Вы находитесь на странице: 1из 24

Chapter 8 Stock Valuation

8.1 Learning Goal 1


1) The most important factors influencing a stock's current
price are its past earnings and dividends.
Answer: FALSE
2) The key to the future behavior of a company lies in the
sales growth and the net profit margin.
Answer: TRUE
3) Companies with high P/E ratios tend to also have high
dividend payout ratios.
Answer: FALSE
4) Higher rates of growth and lower debt levels contribute to
higher P/E ratios.
Answer: TRUE
5) A company's estimated future earnings and its P/E ratio can
be used to estimate the stock's future price.
Answer: TRUE
6) The estimated price of a stock in the future is important
because it includes the projected capital gain on the stock.
Answer: TRUE
7) The single most important issue in the stock valuation
process is a company's
A) past earnings record.
B) historic dividend growth rate.
C) expected future returns.
D) capital structure.
Answer: C
8) Most analysts would not feel comfortable forecasting a
firm's future earnings for more than
A) the next quarter.
B) 1 to 3 years.
C) 4 or 5 years.
D) the next business cycle.
Answer: B
9) The value of a stock is a function of
A) future returns.
B) historic dividend growth rate.
C) most recent earnings per share.
D) past returns.
Answer: A
10) Which of the following variables affect the P/E ratio?
I. capital structure of a firm
II. amount of dividends paid
III. inflation rate
IV. earnings rate of growth
A) I, II and III only
B) I, II and IV only
C) I, III and IV only
D) I, II, III and IV
Answer: D

11) Which of the following might cause a firm's P/E ratio to


fall?
I. Earnings increases in line with past expectations.
II. The industry faces increased competition.
III. Inflation and interest rates rise.
IV. The overall market multiple rises.
A) I, II and III only
B) I, II and IV only
C) I, III and IV only
D) I, II, III and IV
Answer: A
12) Which of the following contributes to high P/E ratios?
A) high dividend payout ratios
B) high rate of earnings growth
C) periods of high inflation
D) high debt ratios
Answer: B
13) High P/E ratios can be expected when investors expect
A) a high rate of growth in earnings.
B) low earnings. relative to market prices.
C) high interest rates.
D) a bear market.
Answer: A
14) Which of the following will most directly influence a
company's market value?
A) the state of the economy
B) the book value of its assets
C) the use of financial leverage
D) its future cash flows
Answer: D
15) List the key variables that affect the P/E ratio and explain
the relationship between each variable and the P/E ratio.
Answer:
(a) growth rate in earnings; the higher the growth rate, the
higher the P/E ratio
(b) general state of the economy; the better the economic
outlook, the higher the P/E
(c) amount of debt in a company's capital structure; the lower
the debt ratio, the higher the P/E
(d) current and projected rate of inflation; the lower the
inflation, the higher the P/E
(e) level of dividends; the lower the dividend payout, the
higher the P/E
8.2 Learning Goal 2
1) A relative P/E ratio greater than 1 indicates that a company
may be undervalued.
Answer: FALSE
2) If net income rises, but the number of shares outstanding
remains the same, EPS will rise.
Answer: TRUE
3) The common-size income statement expresses every item
on the income statement as a percentage of sales.

Answer: TRUE
4) A temporary decline in earnings per share usually results in
a temporary reduction of dividends.
Answer: FALSE
5) A decline in earnings that investors expect to be temporary
may actually increase a firm's P/E ratio.
Answer: TRUE
6) The Merry Co. has current annual sales of $350,000 and a
net profit margin of 6%. Sales are expected to increase by 5%
annually while the profit margin is expected to remain
constant. What is the projected after-tax earnings for two years
from now?
A) $19,294
B) $22,050
C) $23,100
D) $23,153
Answer: D
7) P/E ratios could rise even as earnings fall if
A) earnings fall at a faster rate than stock prices.
B) earnings fall at a slower rate than stock prices.
C) investors expect lower stock prices to be permanent.
D) investors expect lower earnings to be permanent.
Answer: A
8) Even if a company does not officially follow a fixeddividend policy, dividend payments are
A) extremely difficult to predict.
B) very volatile and subject to economic conditions.
C) fairly stable from one time period to another.
D) directly tied to a company's P/E ratio.
Answer: C
9) Whisper numbers are
A) officially published forecast numbers provided by company
management.
B) the official released estimates prepared by financial
analysts.
C) generally less accurate than the released estimates by
analysts.
D) generally higher than the released analysts' forecasts.
Answer: D
Learning Outcome: F-09 Discuss the fundamentals of stocks
and how to value them
AACSB: 3 Analytic Skills
Question Status: Previous Edition
10) If the market multiple is 23.0 and the P/E ratio of a
company is 27.4, then the stock's relative P/E is
A) 0.84.
B) 1.19.
C) 3.21.
D) 4.40.
Answer: B
11) The current annual sales of Flower Bud, Inc. are $178,000.
Sales are expected to increase by 4% next year. The company
has a net profit margin of 5% which is expected to remain

constant for the next couple of years. There are 10,000 shares
of common stock outstanding. The market multiple is 16.4 and
the relative P/E of the firm is 1.21. What is the expected
market price per share of common stock for next year?
A) $15.18
B) $17.66
C) $18.37
D) $19.29
Answer: C
12) The major forces behind earnings per share are
A) return on assets and total asset value.
B) gross revenue and the stock price.
C) growth and the number of shares outstanding.
D) net income and the number of shares outstanding.
Answer: D
13) GLOO stock's P/E ratio is 45 at a time when the market's
P/E ratio is 15. GLOO's relative P/E ratio is
A) 30.
B) -30.
C) 3.
D) .33.
Answer: C
14) Which one of the following is a correct equation to
calculate earnings per share?
A) (ROA)(book value per share)
B) (profit margin)(total asset turnover)(equity multiplier)(book
value per share)
C) (profit margin)(equity multiplier)(book value per share)
D) (profit margin)(book value per share)
Answer: B
15) Which one of the following is is most likely to increase the
price of a stock?
A) rapid growth in sales.
B) rapid growth in dividends.
C) rapid growth in earnings.
D) rapid increases in bond interest rates.
Answer: C
16) Global Warning's EPS for the current year is $2.75 and its
current P/E ratio is 50. You have forecasted that EPS will
grow by 10% but the P/E ratio will fall to 40. What do you
expect the price of a share of GW's stock to be at the end of
next year?
A) $110
B) $121
C) $137.50
D) $151.25
Answer: B
17) Over the last year, a firm's earnings per share increased
from $1.20 to $1.40, its dividends per share increased from
$0.50 to $0.60, and its share price increased from $21 to $24.
The firm maintained a relative P/E of 1.10 over the entire time
period. Given this information, it follows that the
A) stock experienced an increase in its P/E ratio.
B) company had a decrease in its dividend payout ratio.
C) current P/E of the overall market is 26.4.

D) overall market P/E is declining.


Answer: D

future cash flows at a given discount rate.


Answer: TRUE

18) Which of the following will lead to an increase in earnings


per share?
A) an increase in the P/E ratio.
B) an increase in the dividend payout ratio.
C) an increase in return on equity if book value per share stays
the same.
D) a decrease in the number of shares if return on equity stays
the same.
Answer: C

8) The intrinsic value of a stock provides a purchase price for


the stock
A) that is reasonable given the associated level of risk.
B) which will assuredly yield the anticipated capital gain.
C) which will guarantee the expected rate of return.
D) that is always below the market value but yet yields the
expected rate of return.
Answer: A

19) Markhem Enterprises is expected to earn $1.34 per share


this year. The company has a dividend payout ratio of 40%
and a P/E ratio of 18. What should one share of common stock
in Markhem Enterprises be selling for in the market?
A) $9.65
B) $14.47
C) $24.12
D) $33.77
Answer: C
20) The common stock of Jennifer's Furniture Outlet is
currently selling at $32.60 a share. The company adheres to a
60% dividend payout ratio and has a P/E ratio of 19. There are
21,000 shares of stock outstanding. What is the amount of the
annual net income for the firm?
A) $21,619
B) $36,032
C) $48,327
D) $60,053
Answer: B
8.3 Learning Goal 3
1) Risk is brought into the stock valuation process through the
required rate of return.
Answer: TRUE
2) A stock will be an attractive investment if the required rate
of return exceeds the expected rate of return.
Answer: FALSE
3) There is no assurance that the actual rate of return on an
asset will be similar to the projected rate of return.
Answer: TRUE
4) The greater the perceived risk of an asset, the lower the
expected rate of return.
Answer: FALSE
5) Both beta and the expected return on the market portfolio
incorporate risk into the Capital Asset Pricing Model.
Answer: TRUE
6) The required rate of return denotes the minimum rate of
return an investor should expect.
Answer: TRUE
7) The intrinsic value of an asset equals the present value of all

9) The risk-free rate of return is 2.2 percent, the expected


market return is 11 percent, and the beta for Solstice, Inc. is
1.12. What is Solstice's required rate of return?
A) 8.80%
B) 12.05%
C) 13.20%
D) 14.30%
Answer: B
10) The risk free rate is 2%. The expected rate of return on
the market is 12%. Beta and the expected rate of return for
four stocks are as follows.: ABC .8 , 10%; DEF 1, 12%; GHI
1.2 , 13%, and JKL 2, 22%. Which of these stocks should not
be purchased?
A) ABC
B) DEF
C) GHI
D) JKL
Answer: C
11) Which of the following are key inputs to determining the
value of an asset?
I. the required rate of return
II. future cash flows
III. current stock price
IV. timing of future cash flows
A) I and II only
B) I and III only
C) I, II and IV only
D) II, III and IV only
Answer: C
12) In the Capital Asset Pricing Model, which of the following
factors are used to determine the required rate of return?
I. the risk-free interest rate
II. future cash flows
III. expected return on the market portfolio
IV. beta
A) I and II only
B) I, II and III only
C) II, III and IV only
D) I, III and IV only
Answer: D
13) Which of the following characteristics appeal to so-called
value investors?
I. high P/E ratios.
II. low debt to equity ratios
III. high cash flow relative to price

IV. high book value relative to market price


A) I and II only
B) I and III only
C) I, II and IV only
D) II, III and IV only
Answer: D
14) An investor should purchase a stock when
A) the market price exceeds the intrinsic value.
B) the expected rate of return equals or exceeds the required
return.
C) the capital gains rate is less than the required return and no
dividends are paid.
D) the market price is greater than the justified price.
Answer: B
15) William is the type of stock market investor who focuses
on factors such as a company's book value, debt load, return
on equity, and cash flow. In searching for stock investments,
he looks at a company's historical performance and attempts to
find undervalued stocks. This information indicates that Sam
is the type of investor known as
A) a growth investor.
B) a premium investor.
C) an earnings investor.
D) a value investor.
Answer: D
16) Stephanie is an investor who believes that the real key to a
company's future stock price lies in its future earnings. When
investing in a company, she carefully studies its future
earnings potential, and sells a company's stock at the first sign
of any trouble. This information indicates that Della would
correctly be classified as
A) a growth investor.
B) a value investor.
C) a buy-and-hold investor.
D) an index investor.
Answer: A
8.4 Learning Goal 4
1) The required rate of return estimated by the Capital Asset
Pricing Model is not suitable for use in dividend valuation
models.
Answer: FALSE
2) The approach to stock valuation which holds that the value
of a share of stock is a function of its future dividends is
known as the dividend valuation model (DVM).
Answer: TRUE
3) If the annual dividend on a stock never changes, its price
will never change.
Answer: FALSE
4) The dividend valuation model (DVM) is very sensitive to
the growth rate (g) being used, because it affects both the
model's numerator and its denominator.
Answer: TRUE

5) The dividend valuation model estimates the value of a share


of stock as the future value of all dividends.
Answer: FALSE
6) One advantage of the dividend valuation model is that it
does not need a required rate of return.
Answer: FALSE
7) One of the easiest aspects of the dividend valuation model
(DVM) is specifying the appropriate growth rate for a firm's
dividends over time.
Answer: FALSE
8) The intrinsic value of a zero-growth stock is simply the
capitalized value of its annual dividends.
Answer: TRUE
9) One method of estimating the dividend growth rate is to
calculate the discount rate that equates today's dividend with
the dividend paid 5 years ago.
Answer: TRUE
10) The rate of dividend growth can be estimated by
multiplying the return on equity rate by the dividend payout
ratio.
Answer: FALSE
11) The rate of growth can exceed the required return during
the variable-growth period without invalidating the variable
growth dividend valuation model.
Answer: TRUE
12) The subjective approach to determining a required rate of
return for a stock includes
I. the rate of return on a long-term bond.
II. a risk premium for the perceived business risk of the
asset.
III. a risk premium for assuming the risk of the market.
IV. the desired rate of return of the individual investor.
A) I and III only
B) II and IV only
C) I, II and IV only
D) I, II and III only
Answer: D
13) Lindor Inc.'s $100 par value preferred stock pays a
dividend fixed at 8% of par. To earn 12% on an investment in
this stock, you need to purchase the shares at a per share price
of
A) $9.60.
B) $66.67.
C) $96.00.
D) $150.00.
Answer: B
14) The required rate of return necessary for the dividend
valuation model can be estimated using
A) the Capital Asset Pricing Model.
B) comparisons to the rates of return on stocks of similar risk.
C) a subjective assessment of the return required over and
above less risky investments such as government bonds.

D) any or all of the above.


Answer: D
15) James is willing to settle for a 10% rate of return on EG
stock at a time when investors, on average, are requiring an
11% rate of return on the same stock. Which of the following
will happen?
A) James will be have to pay more for the stock than he was
willing to pay.
B) Investors with different required rates of return will pay
different prices for the stock.
C) James will not be able to buy the stock unless the price
changes.
D) James will be happy to buy the stock for less than he was
willing to pay.
Answer: D
16) John requires a 12% rate of return on EG stock at a time
when investors, on average, are requiring an 11% rate of
return on the same stock. Which of the following will
happen?
A) John will have to pay more for the stock than he was
willing to pay.
B) Investors with different required rates of return will pay
different prices for the stock.
C) John will not be able to buy the stock unless the price
changes.
D) John will buy the stock at a lower price.
Answer: C
17) A company that wants to maintain both a constant growth
rate in dividends and a constant payout ratio will have to
A) grow earnings faster than dividends.
B) increase assets at the same rate as dividends.
C) grow earnings at the same rate as dividends.
D) increase stockholders' equity at the same rate as dividends.
Answer: C
18) Michelak's Maritime Industries has relatively stable
earnings and pays an annual dividend of $2.50 per share. This
dividend has remained constant over the past few years and is
expected to remain constant for some time to come. If you
want to earn 12% on an investment in the common stock of
Michelak's, how much should you pay to purchase each share
of stock?
A) $12.50
B) $18.88
C) $20.83
D) $25.00
Answer: C
19) Winifred, Inc. paid $1.64 as an annual dividend per share
last year. The company is expected to increase their annual
dividends by 3% each year. How much should you pay to
purchase one share of this stock if you require a 9% rate of
return on this investment?
A) $18.22
B) $18.77
C) $27.33
D) $28.15
Answer: D

20) One stock valuation model holds that the value of a share
of stock is a function of its future dividends, and that the
dividends will increase at an annual rate which will remain
unchanged over time. This stock valuation model is known as
the
A) approximate yield model.
B) holding period return model.
C) dividend reinvestment model.
D) constant growth dividend valuation model.
Answer: D
21) What is the required rate of return on a common stock that
is expected to pay a $0.75 annual dividend next year if
dividends are expected to grow at 2 percent annually and the
current stock price is $8.59?
A) 8.73%
B) 8.91%
C) 10.73%
D) 11.38%
Answer: C
22) The constant-growth dividend valuation model is best
suited for use with
A) stocks of new or emerging companies.
B) small-cap stocks within growing industries.
C) the stocks of mature, dividend-paying companies.
D) the stocks of cyclical companies.
Answer: C
23) When using the constant-growth dividend valuation
model, which of the following will lower the value of the
stock?
A) An increase in the required rate of return.
B) A decrease in the required rate of return.
C) An increase in the dividend payout ratio.
D) An increase in the growth rate of the dividends.
Answer: A
24) Newton, Inc. just paid an annual dividend of $0.95. Their
dividends are expected to increase by 4% annually. Newton
Company stock is selling for $11.54 a share. What is the
required rate of return on this stock implied by the dividendgrowth model?
A) 8.23%
B) 12.2%
C) 12.6%
D) 13.9%
Answer: C
25) The Frisco Company just paid $2.20 as its annual
dividend. The dividends have been increasing at a rate of 4%
annually and this trend is expected to continue. The stock is
currently selling for $63.60 a share. What is the rate of return
on this stock?
A) 3.46%
B) 3.60%
C) 7.46%
D) 7.60%
Answer: D

26) ABC Company stock currently has a market value


equivalent to its intrinsic value. Marco perceives that ABC
Company is increasing its level of risk and therefore Marco
increases his required rate of return on ABC stock. This
change in the required rate of return
A) will reduce the intrinsic value of ABC stock to Marco.
B) will increase the intrinsic value of ABC stock to Marco.
C) will change the intrinsic value but the direction of the
change cannot be determined.
D) is a signal to Marco that he should buy more ABC
Company stock.
Answer: A
27) In applying the variable-growth dividend valuation model
to a company's stock, analysts frequently define the growth
rate, g, as equal to
A) ROE multiplied by the firm's retention rate.
B) ROE divided by the dividend payout ratio.
C) the dividend payout ratio multiplied by the firm's retention
rate.
D) P/E multiplied by the dividend payout ratio.
Answer: A
28) A company has an annual dividend growth rate of 5% and
a retention rate of 40%. The company's dividend payout ratio
is
A) 35%.
B) 40%.
C) 45%.
D) 60%.
Answer: D
29) Which of the following statements concerning the
constant-growth dividend valuation model is (are) correct?
I. One simple method of estimating the dividend growth rate
is to analyze the historical pattern of dividends.
II. The expected total return equals the return from capital
gains plus the return from dividends paid.
III. The model is applicable to growth firms with initially
high growth rates.
IV. The intrinsic value calculated using this method can
change from one investor to another if their risk-return payoffs
differ.
A) I and IV only
B) II and III only
C) I, II and IV only
D) I, II and III only
Answer: C
30) The variable-growth dividend valuation model
A) develops the value of a stock using the future value of
dividends minus a rate of capital gain growth.
B) is valuable because it accounts for the general growth
patterns of most companies.
C) is invalid if at any point in time the growth rate exceeds the
required rate of return.
D) assumes the rate of dividend growth will vary indefinitely.
Answer: B
31) In general, the higher the retention ratio
A) the higher the future growth rate of the company.

B) the higher the dividends per share of common stock.


C) the higher the future debt-equity ratio.
D) the lower the future book value per share.
Answer: A
32) Martin's Inc. is expected to pay annual dividends of $2.50
a share for the next three years. After that, dividends are
expected to increase by 3% annually. What is the current value
of this stock to you if you require a 9% rate of return on this
investment?
A) $39.47
B) $40.11
C) $41.81
D) $42.92
Answer: A
33) MBA Inc. will pay a dividend for the first time at the end
of 2013. It projects the following dividend per share:
2013
$1.50
2014
$2.00
2015
$2.50
Beginning with 2016 dividends will grow at 4% per year. The
required rate of return is 12%. The intrinsic value of MBA
shares is
A) $25.37.
B) $27.85.
C) $28.96.
D) $38.50.
Answer: B
34) DMC3 Inc. will pay no dividend for 2013 or 2014. At the
end of 2015, it will pay a dividend of $2.50.
Thereafter dividends will grow at 4% per year. The required
rate of return is 12%. The intrinsic value of DMC3 shares is
A) $32.50.
B) $35.00.
C) $24.91.
D) $0.00.
Answer: C
8.5 Learning Goal 5
1) A stock's internal rate of return (IRR) is the discount rate
that cause the present value of future dividends and the price
at which a stock is expected to be sold to equal the current
price of the stock.
Answer: TRUE
2) Neither the P/E approach nor the dividends-and-earnings
approach rely on dividends as the key input into the valuation
of a stock.
Answer: TRUE
3) The dividends-and-earnings approach does not actually
require that a stock pay dividends.
Answer: TRUE
4) The investor's internal rate of return is always equal to the
firm's rate of return on equity.
Answer: FALSE

5) The value of a stock using the price to cash flow approach


is to multiply the P/E ratio times
operating cash flow divided by the number of shares
outstanding.
Answer: FALSE
6) High price/sales multiples go with high profit margins.
Answer: TRUE
7) Most stocks trade at five to seven times their book values.
Answer: FALSE
8) Which of the following statements concerning the
dividends-and-earnings (D&E) approach to stock valuation are
true?
I. The D&E valuation method works just as well for nondividend paying stocks as it does for dividend-paying stocks.
II. The current value of a stock using the D&E method is
equal to the expected selling price of the stock plus the present
value of the future dividends.
III. The D&E approach considers earnings per share and the
price/earnings ratio.
IV. The D&E considers a finite investment period.
A) I and II only
B) III and IV only
C) I, III and IV only
D) I, II and III only
Answer: C
9) Commonly used multiples for determining a stock's value
include
I. price to earnings.
II. price to sales.
III. price to cash flow.
IV. price to dividends.
A) I, II and III only
B) I, III and IV only
C) II, III and IV only
D) I, II III and IV
Answer: A
10) The single most important variable in the dividends-andearnings approach is the
A) rate of growth.
B) applicable beta.
C) appropriate P/E multiple.
D) amount of the future dividends.
Answer: C
11) Zephyr Inc. sells wind based systems for generating
electricity. The company pays no dividends, but you estimate
the stock will be worth $50 per share 5 years from now and
you require a 15% rate of return for stock investments of this
type. What price should you be willing to pay for this stock?
A) $12.50
B) $24.86
C) $43.48
D) $57.50
Answer: B
12) Ivonne has bought shares of RIO, Inc. stock for $25.00 per

share. She expects a 1.00 dividend at the end of this year.


After 2 years, she expects to receive a dividend of $1.25 and
to sell the stock for $28.75. What is Ivonne's required rate of
return?
A) 4.0%
B) 11.6%
C) 15.2%
D) 24.0%
Answer: B
13) An internal rate of return (IRR) is the discount rate that
A) represents the minimal rate required to create a positive net
present value.
B) is the minimal rate of return an investor will accept.
C) provides an investor with their required return.
D) produces a present value of future benefits equal to the
market price of a stock.
Answer: D
14) In the price/earnings approach to stock valuation,
A) historical stock prices are utilized.
B) forecasted EPS are typically used.
C) the P/E ratio is computed by multiplying the stock price by
the earnings per share.
D) the market P/E ratio, adjusted by beta, is used to value
individual stocks.
Answer: B
15) The dividends-and-earnings (D&E) approach to stock
valuation and the variable-growth DVM approach are similar
in that both approaches
A) are present-value based.
B) consider dividends only and ignore the future selling price
of the stock.
C) consider the future selling price of the stock but ignore
future dividends.
D) use the historical dividend growth rate as the key input
figure.
Answer: A
16) The Mayan Calendar Co. intends to liquidate all of its
assets at the end of 2012 and pay out the proceeds as one giant
dividend of $1,000 per share. For an investor who required a
10% rate of return, the value of Mayan stock on January 1
2012 would have been
A) $1,100.
B) $1,000.
C) $909.09.
D) Such a stock would have no value at all.
Answer: C
17) Early in 2013, Maria bought shares of MBA Inc. at $27.85
per share. She received the following dividends per share (end
of year).
2013
$1.50
2014
$2.00
2015
$2.50
Immediately after receiving the the 2015 dividend, she sold
the stock for $32.50 per share. Her internal rate of return on
this investment was
A) 9.17%.

B) 10.25%.
C) 11.99%.
D) 13.85%.
Answer: C
18) Early in 2013, Mathew is analyzing shares of Janeff Corp.
He expects the following dividends per share (end of year).
2013
$1.00
2014
$1.25
2015
$1.50
He expects 2015 earnings per share to be $4.50 and Janeff's
P/E ratio to be 20. His required rate of return for this stock is
12%. He should pay no more than
A) $43.75 per share.
B) $67.02 per share.
C) $68.75 per share.
D) $93.75 per share.
Answer: B
19) Which of the following approaches to stock valuation is
NOT based on a multiple of some figure from the financial
statements?
A) the price to cash flow approach
B) the price to sales approach
C) the dividends-and-earnings approach
D) the price to earnings approach
Answer: C
20) The Highlight Company has a book value of $56.50 per
share, and is currently trading at a price of $59.00 per share.
You are interested in investing in Highlight, and have just used
a present-value based stock valuation model to calculate a
present (intrinsic) value of $55.00 per share for Highlight's
stock. Assuming that your calculations are correct you should
A) buy the stock, because the current market price per share is
higher than the present value.
B) buy the stock, because the book value per share is greater
than the present value.
C) not buy the stock, because the present value is less than the
market price per share.
D) buy the stock, because the book value and the current
trading price are very close to one another in value.
Answer: C
21) According to the price/earnings approach to stock
valuation, if the dividend growth rate is expected to drop or if
the required return goes up, the net effect is a
A) higher P/E ratio.
B) lower P/E ratio.
C) higher stock price.
D) higher retention rate.
Answer: B
8.6 Learning Goal 6
1) The constant growth dividend valuation model works best
for mature companies with a long record of paying dividends.
Answer: TRUE
2) The P/E approach is too complicated to be widely used in
practice.
Answer: FALSE

3) None of the commonly used valuation approaches can


assign a value to a company with no earnings.
Answer: FALSE
4) A drawback to the Price-to-Cash-Flow method of valuation
is that there is no generally accepted cash flow measure.
Answer: TRUE
5) Generally speaking, the higher the Price-to-Sales ratio, the
better.
Answer: FALSE
6) To use the Price-to-Sales valuation approach you also need
to know the after tax profit margin.
Answer: FALSE
7) The price-to-cash-flow method of stock valuation generally
A) uses either EBITDA or operating cash flow from the cash
flow statement as a measure of cash flow.
B) relies on historical cash flows.
C) produces a cash flow multiple that is greater than the P/E
multiple.
D) applies the P/E multiple to the cash flow per share value.
Answer: A
8) For which one of the following situations will the price to
sales valuation model work but the dividend and cash flow
models will not?
A) mature firm with minimal growth opportunities
B) water-powered electric utility company
C) newly-formed biotechnology company with negative
earnings
D) top-performing firm in a mature industry
Answer: C
9) For which one of the following situations will the dividendgrowth models work especially well?
A) mature firm with a policy of increasing its earnings and
dividends at an average rate of 5% per year.
B) a company with highly variable earnings and a policy of
maintaining a constant 50% payout ratio
C) a company that intends to pay out all of its earnings as
dividends.
D) a company that is widely viewed as an attractive takeover
target.
Answer: A
10) EBITDA is an acronym for
A) Earnings Based Information, Total Development Approach.
B) Ernst, Bostwick, Davenport, Innes Approach.
C) Earnings Before Interest, Taxes, Depreciation, and
Amortization.
D) Earnings Before Interest, Taxes, Dividends, and Asset
replacement.
Answer: C
11) A firm with a price to sales ratio of 1 would usually be
considered
A) overvalued.
B) correctly valued.

C) near bankruptcy.
D) undervalued.
Answer: D
Chapter 9 Market Efficiency and Behavioral Finance

IV. Events which affect the market occur randomly.


A) I and II only
B) I, II and III only
C) I, III and IV only
D) I, II, III and IV
Answer: D

9.1 Learning Goal 1


1) In an efficient market, the only means of achieving high
returns is to invest in high-risk securities.
Answer: TRUE
2) The efficient market hypothesis means that trades can be
executed quickly, easily, and inexpensively.
Answer: FALSE
3) If a company's revenues and earnings are highly
predictable, it's stock price will also be highly predictable.
Answer: FALSE

10) Which one of the following best describes the term


"efficient market"?
A) The commissions on large transactions are smaller than the
commissions on small transactions.
B) New information is quickly reflected in security prices.
C) Little time and effort are spent on marketing securities to
the public.
D) The cost of receiving, processing, executing, and reporting
securities orders is small.
Answer: B

5) Investors skilled in exploiting behavioral errors and market


anomalies can consistently outperform the market by a wide
margin.
Answer: FALSE

11) Which of the following activities would be most useful in


an efficient market.
A) buying and holding a diversified portfolio
B) searching for patterns in charts based on stock price
movements
C) analyzing financial ratios based on accounting data
D) buying only securities that have performed well in the
recent past
Answer: A

6) An efficient market reflects


A) only historical information.
B) only the information related to events that have already
occurred.
C) all publicly known information related to past events and
announced future events.
D) all information including predictions about future
information.
Answer: D

12) Followers of the efficient market hypothesis believe that


A) very few investors actually analyze or evaluate stocks
before they make a purchase decision.
B) the needed information to assess the market is available
only to corporate insiders.
C) investors react quickly and accurately to new information.
D) individual traders can have a significant impact on the
price of a security.
Answer: C

7) A type of mutual fund with particular appeal to investors


who accept the efficient market hypothesis is
A) index fund.
B) asset allocation fund.
C) growth opportunities fund.
D) emerging markets fund.
Answer: A

13) The weak form of the efficient market theory contends that
A) past price performance is useless in predicting future price
movements.
B) past performance can help determine the general direction
of future price movements.
C) any publicly available information is useless in predicting
future price movements.
D) price movements are not random but follow a general trend
over a period of time.
Answer: A

4) Historically higher returns on the stocks of small companies


can be completely explained by their higher risk.
Answer: FALSE

8) In an efficient market, prices appear to move randomly


because
A) investors do not process new information correctly.
B) only new information affects stock prices.
C) insider trading has an unpredictable effect on stock prices.
D) the number of investors who can forecast prices correctly is
too small to have any effect.
Answer: B
9) The efficient market hypothesis rests on which of the
following assumptions?
I. Information is widely available to all investors almost
simultaneously.
II. Investors react quickly to new information.
III. Investors correctly interpret all available information.

14) Based on the semi-strong form of the efficient market


theory, an investor reacting immediately to a news flash on the
television generally
A) can make an abnormal profit.
B) is guaranteed to make a reasonable profit.
C) is too late to make an exceptional profit.
D) will suffer a loss.
Answer: C
15) The strong form of the efficient market hypothesis
contends that
A) a select few institutional investors can earn abnormal

profits.
B) abnormal profits are randomly distributed.
C) no one can consistently earn a profit.
D) no one can consistently earn abnormal profits.
Answer: D

market behavior.
B) suggests that random patterns appear but only over long
periods of time.
C) has been disproved based on recent computer simulations.
D) accounts for market anomalies such as calendar effects.
Answer: A

9.2 Learning Goal 2


1) For most companies, the stock price follows the same
seasonal pattern as revenues and earnings.
Answer: FALSE
2) If stock prices move randomly, charting and technical
analysis are useful investment tools.
Answer: FALSE
3) Advocates of the weak-form efficient market hypothesis
claim that past price movements are the best predictors of
future price movements.
Answer: FALSE
4) Even if the semi-strong form of the efficient market
hypothesis is true, trading on illegal insider information may
lead to abnormal profits.
Answer: TRUE
5) Followers of the random walk hypothesis believe that
A) security analysis is the best tool to utilize when investing in
the stock market.
B) the price movements of stocks are unpredictable, and
therefore security analysis will not help to predict future
market behavior.
C) that traders can earn higher than normal returns by
exploiting market anomalies such as the small-firm effect.
D) support levels and resistance lines, when combined with
basic chart formations, yield both buy and sell signals.
Answer: B
6) Which one of the following statements concerning the
random walk hypothesis is correct?
A) Stock price movements are predictable but only over short
periods of time.
B) Random price movements support the weak form efficient
market hypothesis.
C) Stock prices in general follow repetitive patterns but the
actions of individual investors are random in nature.
D) Random price movements indicate that investors can earn
abnormal profits on a routine basis.
Answer: B
7) Behavioral finance would explain many market anomalies
to
A) the influence of human emotions and biases on securities
markets.
B) random price movements that only appear to have a
rational explanation.
C) poorly understood aspects of market efficiency.
D) illegal manipulation of securities prices.
Answer: A
8) The random walk hypothesis
A) implies that security analysis is unable to predict future

9) There is evidence to support the contention that company


insiders
A) cannot earn abnormal profits because they are not
permitted to trade shares in their company's stock without a
one-month advance notice to the SEC.
B) can profit in a manner that counters the strong form of the
efficient market hypothesis.
C) generally earn a profit equal to that of public investors.
D) have no distinct advantage when trading shares of their
company's stock.
Answer: B
10) Which of the following is true?
A) Historically, high P/E or growth stocks have outperformed
low P/E or value stocks.
B) Historically, low P/E or value stocks have outperformed
high P/E or growth stocks.
C) After adjusting for risk, high P/E or growth stocks and low
P/E or value stocks have performed about the same over time.
D) the P/E effect is limited to U.S. stocks.
Answer: B
11) Market anomalies are caused by
A) investors' efforts to avoid or postpone taxes.
B) different levels of risk.
C) statistical quirks.
D) some poorly understood combination of factors.
Answer: D
12) Which one of the following statements is correct?
A) The weekend effect states that security prices tend to rise
between Friday afternoon and Monday morning.
B) The market responds immediately to reflect the information
contained in quarterly earnings reports.
C) Low P/E stocks tend to outperform high P/E stocks on a
risk-adjusted basis.
D) The market fully anticipates the information contained in
an earnings announcement prior to the actual announcement.
Answer: C
9.3 Learning Goal 3
1) Behavioral finance suggests that investors react to new
information in an efficient manner such that security prices
accurately reflect the new information.
Answer: FALSE
2) Fund managers tend to have too little confidence in their
abilities leading them to be excessively cautious.
Answer: FALSE
3) Individuals tend to invest in mutual funds that have recently
been performing well.
Answer: TRUE

4) Analysts tend to issue similar recommendations on


individual securities.
Answer: TRUE
5) Most investors quickly sell their losers and hold on to their
winners.
Answer: FALSE
6) Most investors are slow to accept evidence that contradicts
their strongly held beliefs.
Answer: TRUE
7) Self attribution bias causes investors to attribute their
successes to skill and failures to chance.
Answer: TRUE
8) There is strong evidence that investors who trade frequently
outperform the market.
Answer: FALSE
9) Some behavioral characteristics cause investors to realize
lower investment returns.
Answer: TRUE
10) Investor overconfidence leads to
A) too little trading.
B) an overestimation of risk.
C) overly optimistic predictions.
D) narrow framing.
Answer: C
11) Four "decision traps " identified by behavioral finance are
A) overconfidence, representativeness, loss aversion, narrow
framing
B) lack of confidence, representativeness, overreaction,
narrow framing
C) overconfidence, representativeness, loss aversion,
comprehensive framing
D) overconfidence, unfamiliarity bias, loss aversion. narrow
framing
Answer: A

14) The tendency to hold onto losing stocks in the hope that
they will recoup is called
A) loss aversion.
B) representativeness.
C) narrow framing.
D) biased self-attribution.
Answer: A
15) Which of the following characteristics are referred to as
representativeness?
I. hesitating to sell stocks at a loss
II. basing conclusions on small samples
III. underestimating the effects of random chance
IV. underestimating the level of risk in an investment
A) I and IV only
B) II and III only
C) I, II and III only
D) I, II, III and IV only
Answer: B
16) Which of the following are common but dysfunctional
investor behaviors?
I. overinvesting in companies with familiar names
II. dividing their funds equally among available choices,
even if several of the choices serve the same
purpose
IV. hastily disposing of stocks that have dropped in price in
order to take advantage of tax breaks
IV. exaggerating the role of luck and randomness in
investment success or failure
A) I and IV only
B) II and III only
C) I, II and III only
D) I, II, III and IV only
Answer: C
17) People tend to
A) ignore information that contradicts their current beliefs.
B) overestimate the effects of random chance.
C) be underconfident in their judgment of investments.
D) look at the entire situation when analyzing an individual
security.
Answer: A

12) The tendency of investors to blame others for their failures


and take personal credit for their successes is referred to as
A) loss aversion.
B) representativeness.
C) narrow framing.
D) self-attribution bias.
Answer: D

18) The tendency of investors to take greater risks after a large


loss and fewer risks after a large gain can be attributed to
A) overconfidence.
B) the "house money" effect.
C) loss aversion.
D) representativeness.
Answer: C

13) The most important lesson investors can learn from


behavioral finance is
A) to understand psychological factors influencing long-term
price movement.
B) to have the humility to let professionals manage their
investments.
C) how to avoid letting their emotions and biases affect their
investment decisions.
D) to have confidence in their instincts and first impressions.
Answer: C

19) Investors who buy mutual funds that have had large gains
over the last few years are exhibiting a tendency known as
A) overconfidence.
B) narrow framing.
C) loss aversion.
D) representativeness.
Answer: D
20) Investors who obsessively monitor their last few stock
purchases while paying little attention to the rest of their
portfolio are exhibiting the tendency known as

A) overconfidence.
B) narrow framing.
C) loss aversion.
D) representativeness.
Answer: B
21) Which of the following accurately reflect appropriate
investment guidelines?
I. Always invest in last years best performing mutual fund.
II. Trade frequently to increase your investment returns.
III. Sell losing stocks unless you are willing to buy them at
the current price.
IV. Take corrective action when so indicated.
A) I and II only
B) III and IV only
C) I, III and IV only
D) I, II, III and IV
Answer: B
22) Which of the following statements correctly present
recommendations based on behavioral finance?
I. Don't hesitate to sell a losing stock.
II. Trade frequently.
III. Chase performance.
IV. Be humble and open-minded.
A) I and II only
B) I and IV only
C) II and III only
D) III and IV only
Answer: B
23) Evidence suggests that the price of a stock continues to
move up or down for a period of
A) a decade or more.
B) 3 to 5 years.
C) 1 to 3 years.
D) 6 to 12 months.
Answer: D
24) Market bubbles such as the technology bubble of the
1990s and the housing bubble of 2004-2007 are best explained
by
A) the efficient market hypothesis.
B) behavioral finance and economics.
C) rational expectations theory.
D) anomaly theory.
Answer: B
9.4 Learning Goal 4
1) Recent academic studies in behavioral finance confirm that
markets are even more efficient than previously believed.
Answer: FALSE
2) The efficient market hypothesis has some trouble
explaining the existence of market anomalies.
Answer: TRUE
3) Evidence suggests that growth stocks tend to outperform
value stocks.
Answer: FALSE

4) Stocks of small companies have a historical tendency to do


especially well in the month of January.
Answer: TRUE
5) One of the calendar effect market anomalies indicates that
________ in value during January.
A) large cap stocks tend to decline
B) equities in general tend to decline
C) small cap stocks tend to increase
D) equities in general tend to increase
Answer: C
6) The anomaly known as post-earnings announcement drift or
momentum describes the tendency of stock prices to rise or
fall for several ________ after unexpectedly good or bad
earnings announcements.
A) months
B) weeks
C) days
D) hours
Answer: B
7) Even after adjusting for risk, ________ firms earn have,
over long periods of time, earned higher returns than
________ firms.
A) small, large
B) large, small
C) new, old
D) old, new
Answer: A
8) The tendency of small firms to have higher returns than
large firms , even after adjusting for risk, may be attributable
to
A) representativeness.
B) overconfidence.
C) familiarity bias.
D) loss aversion.
Answer: C
9.5 Learning Goal 5
1) A principal objective of technical analysis is trying to
determine when to invest.
Answer: TRUE
2) Investors should never combine fundamental analysis and
technical analysis.
Answer: FALSE
3) Resources for technical analysis are readily available on the
Internet.
Answer: TRUE
4) For technical analysts, the forces of supply and demand
have an important effect on the prices of securities.
Answer: TRUE
5) The stock market is considered strong when the market
volume decreases in a declining market.

Answer: TRUE
6) Market volume is a function of market demand for and
supply of stocks.
Answer: TRUE
7) The breadth of the market refers to the spread between the
number of stocks advancing and those declining in value.
Answer: TRUE
8) A relatively high level of short sells is an indicator of a
current bull market.
Answer: FALSE
9) The odd-lot theory supports buying into the market when
the number of odd-lot trades rises.
Answer: FALSE
10) Technical analysis is a mechanical approach to investing.
Answer: TRUE
11) You are most likely better off doing the opposite of what
most investment newsletter experts advise doing.
Answer: TRUE
12) An oversold market is generally considered to be
overvalued.
Answer: FALSE
13) Technical analysis primarily monitors shifts in the
________ in the market.
A) level of risk
B) supply and demand forces
C) volume of trading
D) rate of return
Answer: B
14) Which of the following are included in technical analysis?
I. charting price movements
II. tracking trading volume
III. determining the investor's risk tolerance
IV. monitoring odd-lot trading
A) I and II only
B) II and III only
C) I, II and III.
D) I, II and IV
Answer: D
15) Technical analysis is used for which of the following
purposes?
I. deciding when to enter the market
II. deciding whether to sell a stock
III. deciding which stocks to buy
IV. deciding whether basic economic conditions are favorable
for investing
A) I and II only
B) II and III only
C) I, II and III only
D) I, II, III and IV
Answer: C

16) The principal objective of technical analysis is


A) determining the best time to get into or out of the market.
B) maintaining the lowest level of risk possible.
C) avoiding all unpleasant surprises in the market.
D) increasing trading to improve overall profits.
Answer: A
17) Which of the following are used as indicators of a strong
market in the future?
I. The advance-decline spread is increasing at a time when
the advances outnumber the declines.
II. The level of short interest is relatively high.
III. The net difference of odd-lot purchases minus odd-lot
sales begins increasing.
IV. The trading volume increases in a declining market.
A) I and II only
B) III and IV only
C) I, II and III only
D) I, II, III and IV
Answer: A
18) The odd-lot trading theory advocates that small investors
A) tend to buy high and sell low.
B) react in a manner which generally forecasts the future
direction of the market.
C) are the first to react to market changes.
D) tend to be the first to speculate on a bull market.
Answer: A
19) A technical analyst might have an interest in which of the
following?
I. level of short interest
II. relative price level
III. point-and-figure charts
IV. odd-lot transactions
A) I and III only
B) I, II and IV only
C) I, II and III only
D) I, II, III and IV
Answer: D
20) A technical analyst tends to
A) employ multiple market measures in his/her analysis.
B) concentrate on a sole market measure to determine market
signals.
C) concentrate solely on buy signals in the market.
D) forward test their theories to validate their validity.
Answer: A
21) One of the most popular tools of technical analysis is
A) charting.
B) financial statement analysis.
C) investor profiling.
D) investor behavior analysis.
Answer: A
22) Chartists advocate that
A) history repeats itself.
B) patterns appear that are very clear and distinctive.
C) formations are less important than the direction of the latest
price movement.

D) a breakout below a support line is a buy signal.


Answer: A
9.6 Learning Goal 6
1) The relative strength index compares a security's price
relative to itself over a period of time.
Answer: TRUE
2) The simple moving average is a weighted average.
Answer: FALSE
3) The purpose of moving averages is to reduce the effect of
random, short-term market fluctuations.
Answer: TRUE
4) The mutual fund cash ratio (MFCR) compares the
percentage of an investor's portfolio held in cash to the
percentage held in mutual funds.
Answer: FALSE
5) Charts are only used to confirm past trends.
Answer: FALSE
6) Charts are useful as a means of spotting developing trends.
Answer: TRUE
7) The advance/decline line is be used to time both the
purchase and the sale of securities.
Answer: TRUE
8) Which one of the following relative strength values would
most indicate that a stock is oversold?
A) 120
B) 80
C) 20
D) -20
Answer: C
9) The new highs-new lows indicator is based on prices over
the past
A) week.
B) 90 days.
C) 52 weeks.
D) calendar year.
Answer: C
10) The theory behind the mutual fund cash ratio is
A) mutual fund managers hold high levels of cash when they
are optimistic about market conditions.
B) when mutual fund managers hold high levels of cash, they
must eventually buy stocks with it.
C) when mutual fund managers hold low levels of cash they
are pessimistic about market conditions.
D) when market conditions are favorable, shareholders remit
more cash than the managers can invest.
Answer: B
11) On a given trading day, 700 stocks advanced and 1,200
stocks declined. The volume of declining stocks was 280
million while the volume of advancing stocks was 530

million. What is the TRIN value for the day?


A) 0.31
B) 0.91
C) 1.10
D) 3.24
Answer: A
12) A high TRIN value is considered
A) good for the market when the number of advancing stocks
is declining.
B) good for the market when the volume of advancing stocks
is declining.
C) bad for the market when the trading volume in the
declining stocks is rising.
D) bad for the market when the number of declining stocks is
stable.
Answer: C
13) The confidence index indicates a strong stock market
when the
A) ratio of the average yield on high-grade corporate bonds to
the average yield on low-grade corporate bonds rises.
B) ratio between the average yield on S&P 500 stocks to the
average yield on high-grade corporate bonds rises.
C) consumer confidence index rises above its long-term trend.
D) demand for bonds declines relative to the demand for
equity securities.
Answer: A
14) The confidence index indicates
A) stock investors ' perceptions of risk in the economy.
B) bond investors ' perceptions of risk in the economy.
C) consumers' perceptions of risk in the economy.
D) investors' trust in financial advisors.
Answer: B
15) Which one of the following combinations best signals a
strong market?
I. a greater number of advancing stocks than declining
stocks
II. a greater number of declining stocks than advancing
stocks
III. a greater volume in rising stocks than in declining stocks
IV. a greater volume in declining stocks than in advancing
stocks
A) I and III
B) I and IV
C) II and III
D) II and IV
Answer: A
16) The on balance volume (OBV) indicator
A) considers only the amount of daily trading volume.
B) indicates an up market when heavy volume accompanies
price increases.
C) is divergent when the OBV is falling and prices are also
falling.
D) rises by 10,000 on a day when the trading volume is 5,000
shares and the price rises by $2.
Answer: B

17) Which one of the following statements is correct


concerning the mutual fund cash ratio (MFCR)?
A) The lower the value of the MFCR, the stronger the market
will be in the future.
B) The MFCR is equal to the cash inflows into money market
funds divided by the cash flows out of money market funds.
C) A low MFCR indicates that fund managers might be forced
to sell securities should investors wish to withdraw funds.
D) A MFCR value greater than 12 is considered a bearish
signal.
Answer: C
18) Which one of the following statements is correct
concerning the mutual fund cash ratio (MFCR)?
A) When mutual funds have a lot of cash it is a bearish signal
because managers are not buying stocks.
B) Low mutual fund cash is bullish because it means
managers have been buying stocks.
C) Low mutual fund cash indicates that fund managers might
be forced to sell securities should investors wish to withdraw
funds, a bearish signal.
D) A high MFCR is like high short interest in that it indicates
pent up demand.
Answer: D
19) The on balance volume (OBV) indicator
A) indicates a market bottom when prices and volume are both
falling.
B) is optimistic when prices are rising on low volume.
C) is optimistic when prices are rising on high volume.
D) is neutral whenever prices and volume move in opposite
directions.
Answer: C
20) Technical analysts consider the stock market to be strong
when volume ________ in a rising market and ________
during a declining market.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Answer: B
21) Which of the following is a contrary indicator?
A) odd-lot trading
B) breadth of market and market volume
C) short-interest and the advance/decline line
D) new highs-new lows indicator and the TRIN measure
Answer: A
22) Which of the following patterns are used by chartists to
predict future events in the markets?
I. head and shoulders
II. inverted saucers
III. consolidation triangles
IV. triple tops
A) I, II and IV only
B) I, III and IV only
C) I, II and III only
D) I, II, III and IV
Answer: D

23) Which of the following is used to identify long-term


trends?
A) odd-lot trading
B) breadth of market and market volume
C) 10 moving average
D) 100 day moving average
Answer: D
24) Which of the following signals that a market top or bottom
is near?
A) mutual fund cash ratio
B) the relative strength index
C) odd-lot volume
D) on balance volume
Answer: B
25) According to chartists, a breakout below a support level
A) is a sell signal.
B) is a signal that the market is stagnant.
C) is a buy signal but only for value investors.
D) is a buy signal.
Answer: A
26) On a given day, 200 of the S&P 500 stocks were up, 300
were down. Volume for up stocks was 500 million, volume
for down stocks was 700 million. The Trading Index or TRIN
for that day was
A) .48.
B) .70.
C) .93.
D) 3.5.
Answer: A
27) What is the ten-day simple moving average if the latest
daily closing prices are $5, $7, $8, $5, $4, $6, $7, $8, $9, $10?
A) $6.00
B) $6.90
C) $7.67
D) $10.00
Answer: B
28) Which one of the following statements is correct
concerning moving averages?
A) The longer the time period under consideration, the more
sensitive the moving average is to daily price fluctuations.
B) A simple moving average is computed as the arithmetic
mode.
C) The shorter the time period under consideration, the easier
it is to spot long-term price trends.
D) A moving average helps remove short-term fluctuations
from the analysis.
Answer: D
29) A sell signal is indicated by a security's price
A) rising above the moving average.
B) falling below the moving average.
C) equaling the moving average.
D) running parallel to the moving average.
Answer: B

Chapter 10 Fixed-Income Securities


10.1 Learning Goal 1
1) Bondholders can earn income both from interest and from
capital gains.
Answer: TRUE
2) The primary reasons for owning bonds are the income they
provide and also the stability they bring to an investment
portfolio.
Answer: TRUE
3) Over the period from late 2008 through 2012, the bond
market outperformed the stock market.
Answer: TRUE
4) As investors approach retirement age, they should hold
more bonds and less stock.
Answer: TRUE
5) During the period 2008 through 2012, bonds performed
poorly because of falling interest rates.
Answer: FALSE
6) Bond prices are stable over any five- to ten-year period.
Answer: FALSE
7) Bonds are typically a good investment choice for an
individual who is seeking long-term preservation of capital.
Answer: TRUE
8) Corporate bonds are actively traded in the secondary
markets.
Answer: FALSE
9) Which of the following are advantages of owning bonds?
I. diversification properties
II. higher long-term returns than equity holdings
III. current income
IV. relatively low risk
A) I and II only
B) I, III and IV only
C) I, II and III only
D) I, II, III and IV
Answer: B
10) When bonds are initially added to an all-equity portfolio
the
A) level of risk of the portfolio is impacted more than the rate
of return.
B) rate of return on the portfolio is impacted more than the
level of risk.
C) level of risk and the rate of return are equally impacted.
D) rate of return is not impacted but the level of risk is
lowered.
Answer: A
11) the phenomenon known as "flight to quality" causes yields
on government bond and corporate bonds
A) to rise in tandem.

B) to fall in tandem.
C) to move in opposite directions.
D) to become less volatile.
Answer: C
12) Which of the following types of risk affect bonds?
I. call risk
II. business risk
III. purchasing power risk
IV. liquidity risk
A) III and IV only
B) II, III and IV only
C) I, III and IV only
D) I, II, III and IV
Answer: D
13) The bond market is considered bearish when
A) market interest rates are low or falling.
B) market interest rates are high or rising.
C) the risk-free rate of return exceeds the required rate of
return.
D) more bonds are called than issued over a given period of
time.
Answer: B
14) Under normal economic conditions, the major source of
risk faced by investors who purchase investment grade bonds
is
A) purchasing power risk.
B) interest rate risk.
C) liquidity risk.
D) default risk.
Answer: B
15) In a severe recession, the major source of risk faced by
investors who purchase corporate bonds is
A) purchasing power risk.
B) interest rate risk.
C) liquidity risk.
D) default risk.
Answer: D
16) When interest rates are falling, most of the return on bonds
will come from
A) inflation gains.
B) interest income.
C) capital gains.
D) risk premiums.
Answer: C
17) Which type of risk is based on the financial integrity of a
bond issuer?
A) liquidity risk
B) call risk
C) default risk
D) interest rate risk
Answer: C
10.2 Learning Goal 2
1) Each interest payment on a 6%, semi-annual bond is $60.

Answer: FALSE

Answer: D

2) Each interest payment on a 6%, semi-annual bond is $30.


Answer: TRUE

14) Most bonds pay interest


A) annually.
B) semi-annually.
C) quarterly.
D) monthly.
Answer: B

3) When a bond is called, the bondholder generally faces a rate


of return that is lower than expected.
Answer: TRUE
4) The holder of a serial bond receives both semi-annual
interest and principal payments over the life of the bond.
Answer: FALSE
5) The risk premium component of a bond's market interest
rate is related to the characteristics of the particular bond and
its issuer.
Answer: TRUE
6) Most bonds pay interest quarterly.
Answer: FALSE
7) Debt instruments with maturities of 2 to 10 years are known
as notes.
Answer: TRUE
8) A bond which is noncallable for a period of time after
which it is freely callable is called a deferred call bond.
Answer: TRUE
9) The initial call price of an 8% bond could be as high as
$1,080.
Answer: TRUE
10) A single bond issue with multiple maturity dates is called a
A) callable bond.
B) premium bond.
C) serial bond.
D) term bond.
Answer: C
11) Debentures are secured by
A) the issuer's good name.
B) earnings from the project the debentures were issued to
finance.
C) financial assets held in trust by a third party.
D) physical assets like real estate.
Answer: A
12) A note is generally defined as debt with an initial term to
maturity of
A) zero to two years.
B) one year or less.
C) two to ten years.
D) ten to thirty years.
Answer: C
13) Under which bond provision is the issuer required to retire
portions of the bond issue prior to maturity?
A) call feature
B) refunding provision
C) subordination clause
D) sinking fund feature

15) A bond which has a deferred call


A) does not have to be redeemed when it reaches maturity.
B) can be retired at any time prior to maturity provided six
months notice is given.
C) cannot be retired for a specific period of time after which it
can be retired at any time.
D) can be retired at any time during the initial call period but
after that time can not be redeemed prior to maturity.
Answer: C
16) Bonds issued by stable sovereign governments such as the
U.S. and the nations of Western Europe
A) are rated AAA by definition.
B) can be and have been downgraded.
C) are exempt from rating requirements.
D) are allowed to issue their own ratings.
Answer: B
17) When a bond's rating improves from A to AA
A) the coupon rate will fall and the price will rise.
B) both the coupon rate and the price will rise.
C) both the coupon rate will stay the same and the price will
fall.
D) the coupon rate will stay the same, but the price will rise.
Answer: D
18) Which of the following statements about bond rating
agencies is true?
A) Bonds are rated by an agency of the federal government.
B) Bonds rated AAA are guaranteed by the company that
issues the rating.
C) During the financial crisis of 2007-2009 it became clear
that rating agencies severely underestimated the risks of some
issues.
D) Bond rating agencies are paid by investors and receive no
compensation from the bonds' issuer.
Answer: C

19) Lee is considering buying one of two newly-issued bonds.


Bond A is a twenty-year, 7.5% coupon bond that is noncallable. Bond B is a twenty-year, 8.25% bond that is callable
after two years. Both bonds are comparable in all other
aspects. Lee plans on holding his bond to maturity. What
should Lee do if he feels that interest rates are going to decline
by 2% in the near future and then remain relatively stable
thereafter?
A) purchase Bond A
B) purchase Bond B
C) purchase neither A nor B at this time
D) negotiate a higher rate on Bond A
Answer: A

yield on riskier bonds will tend to


A) rise.
B) fall.
C) stagnate.
D) become volatile.
Answer: A

20) Which of the following is(are) senior bonds?


I. equipment trust certificates
II. mortgage bonds
III. debentures
IV. collateral trust bonds
A) I and II only
B) II and IV only
C) III only
D) I, II and IV only
Answer: D

27) Which of the following factors are included in the rating


analysis of a corporate bond?
I. the issue's indenture provisions
II. the liquidity position of the issuing company
III. the issuing company's relative debt burden
IV. the stability of the company's earnings
A) I and II only
B) I, II and III only
C) II, III and IV only
D) I, II, III and IV
Answer: D

21) Which one of the following is the most junior in terms of


its claim on earnings and assets?
A) subordinated debenture
B) mortgage bond
C) collateral trust bond
D) equipment trust certificate
Answer: A
22) Bonds are least likely to be called if
A) they are selling at a substantial premium.
B) they are selling at a substantial discount.
C) the price is close to par value.
D) if they do not mature for at least 5 years.
Answer: B
23) Which of the following will tend to improve a bond's
rating?
I. an improvement in the firm's cash flow
II. an increase in corporate debt
III. an increase in net profits
IV. an increase in net working capital
A) I, II and III only
B) II, III and IV only
C) I, III and IV only
D) I, II, III and IV
Answer: C
24) Bonds with one of the top four ratings (Aaa through Baa,
or AAA through BBB) are designated as
A) split bonds.
B) investment grade bonds.
C) illiquid bonds.
D) high-yield bonds.
Answer: B
25) When the economy is moving toward a recession, the

26) If a bond rating moves from a BB to a BBB rating


A) the bond will still be classified as junk.
B) it must also move from a Ba to a Baa rating.
C) the market yield on the bond will rise.
D) the market price of the bond will rise.
Answer: D

10.3 Learning Goal 3


1) When interest rates change, the prices of short-term bonds
will change more than those of long-term bonds.
Answer: FALSE
2) Interest rates and bond prices are positively related.
Answer: FALSE
3) An increase in the market rate of interest can cause a
bondholder to realize a capital loss on the sale of their bonds.
Answer: TRUE
4) Fixed coupon rates cause bond yields to lag inflation rates
when inflation rates begin to increase significantly.
Answer: TRUE
5) Issuers must redeem outstanding bonds for at least their par
value.
Answer: FALSE
6) If you want to reduce the price volatility of your bond
portfolio, you should shorten the time-to-maturity of your
portfolio.
Answer: TRUE
7) If you feel interest rates are going to drop significantly, you
could potentially realize large capital gains by purchasing
long-term zero coupon bonds prior to the rates decreasing.
Answer: TRUE
8) Investment-grade bonds are more interest rate sensitive than
junk bonds.
Answer: TRUE

9) Which one of the following variables has the greatest effect


on bond prices?
A) economic growth
B) interest rates
C) inflation
D) stock market returns
Answer: B
10) An increase in the market rate of return on an outstanding
bond will
A) increase the coupon rate.
B) decrease the coupon rate.
C) increase the bond price.
D) decrease the bond price.
Answer: D
11) The Franklin Company issued a 6% bond three years ago
at par value. The market interest rate on comparable bonds
today is 5%. The Franklin Company bond currently pays
________ a year in interest and the bond sells at a ________.
A) $60; discount
B) $60; premium
C) $50; discount
D) $50; premium
Answer: B
12) Solstice Corporation issued a 5% bond four years ago at
par value. The market interest rate on comparable bonds today
is 4%.
A) This bond sells at a discount and the coupon rate is higher
than the yield.
B) This bond sells at a premium and the coupon rate is lower
than the yield.
C) This bond sells at a discount and the coupon rate is lower
than the yield.
D) This bond sells at a premium and the coupon rate is higher
than the yield.
Answer: D
13) Two years ago, Mathew purchased a 10 year government
bond with a yield of 4.75%. Today, the interest rate on
government bonds with 8 years to maturity is 3.5%. If
Mathew sells his bond today, he most likely will
A) realize a capital gain.
B) realize a capital loss.
C) sell the bond at face value.
D) sell the bond at par value.
Answer: A
14) At the time you purchase a bond, you know the exact
holding period return you will earn if
A) the bond is called at any time prior to maturity.
B) you resell the bond in exactly one year from the date of
purchase.
C) the market rate of interest declines within the next year.
D) you hold the bond to maturity.
Answer: D
15) When the market rate of return exceeds the coupon rate, a
bond will sell at
A) par.
B) face value.

C) a premium.
D) a discount.
Answer: D
16) Which one of the following combination of features
causes bond prices to be the most volatile?
A) low coupon, short maturity
B) high coupon, short maturity
C) low coupon, long maturity
D) high coupon, long maturity
Answer: C
17) Bob expects to retire in a few years and his primary goal is
to avoid major losses in his 401-K account. Which of the
following bond characteristics should he be seeking?
I. long maturities
II. high ratings
III high yields
IV. short maturities
A) I and III only.
B) I, III and III only
C) II and IV only
D) II, III and IV only.
Answer: C
18) If you expect market interest rates to rise, you should
purchase
A) short term, low coupon bonds.
B) short term, high coupon bonds.
C) long term, low coupon bonds.
D) long term, high coupon bonds.
Answer: B
19) A bond quoted at a price of 101.2
A) is a deep discount bond.
B) yields 10.12%.
C) yields 12%.
D) has a coupon rate that exceeds the market rate.
Answer: D
10.4 Learning Goal 4
1) A debenture is secured only by the issuer's promise to repay
the debt.
Answer: TRUE
2) The par value of a Treasury inflation-indexed obligation is
established as $1,000 over the life of the bond.
Answer: FALSE
3) In an inflationary environment, the interest payments on
Treasury inflation-indexed obligations increase over time.
Answer: TRUE
4) If the inflation rate is 2%, the principal of a Treasury
inflation protection security will from $1,000 to $1,020.
Answer: TRUE
5) If you hold a zero-coupon bond to maturity, the fully
compounded rate of return is virtually guaranteed to be equal
to the rate stated at the time the bond was purchased.

Answer: TRUE
6) Zero coupon bonds have very limited price volatility.
Answer: FALSE
7) Municipal bonds are most attractive to residents of states
with high income tax rates.
Answer: TRUE
8) Mortgage-backed bonds are issued primarily by state
governments and are secured by home mortgages.
Answer: FALSE
9) Mortgage-backed securities are self-liquidating.
Answer: TRUE
10) Collateralized mortgage obligations are relatively low risk
investments.
Answer: FALSE
11) Junk bond prices tend to be volatile just like common
stock prices.
Answer: TRUE
12) The various CMO tranches can have significantly different
degrees of prepayment risk.
Answer: TRUE
13) CMO tranches are structured to create long, intermediate
and short-term securities.
Answer: TRUE
14) Which one of the following statements concerning
Treasury bonds is correct?
A) The coupon rate of a TIPS is adjusted periodically in
response to changes in the rate of inflation.
B) Treasury bonds have maturity dates ranging from two to
ten years.
C) Interest earned on Treasury bonds is tax-exempt at the
federal level.
D) All Treasury securities are backed by the "full faith and
credit" of the U.S. government.
Answer: D
15) Which of the following statements about U.S. Treasury
bonds are true?
I. They are backed by the "full faith and credit" of the U.S.
government.
II. They are all indexed and adjusted for inflation.
III. They trade in a very thin market.
IV. They are traded in both U.S. and foreign markets.
A) I, II and IV only
B) I, III and IV only
C) II and III only
D) I and IV only
Answer: D
16) Debt securities issued by the Federal Home Loan Bank,
the Student Loan Marketing Association and the Government
National Mortgage Association are known as
A) agency bonds.

B) organizational bonds.
C) municipal bonds.
D) Treasury bonds.
Answer: A
17) Which of the following statements concerning mortgage
backed securities are correct?
I. They are secured by a pool of residential mortgages.
II. A portion of the income stream is a non-taxable return of
capital.
III. They are backed by the full faith and credit of the U.S.
government.
IV. Their maturity depends on prepayments of the mortgages
in the pool.
A) I and III only
B) I and IV only
C) II, III and IV only
D) I, II and IV only
Answer: D

18) Municipal bonds can be either general obligation bonds or


revenue bonds. Of these two types of municipal bonds, only
general obligation bonds
A) are specifically serviced by the income generated from
particular projects.
B) are backed by the full faith and credit of the issuer.
C) repay the principal only if a sufficient level of revenue is
generated.
D) have the principal and interest guaranteed by a third party.
Answer: B
19) Which of the following statements are correct concerning
municipal bonds?
I. Yields on municipal bonds are usually lower than yields
on Treasury bonds.
II. Municipal bonds are most appealing to individuals with
high incomes.
III. Interest on a municipal bond is exempt from federal
income tax.
IV. Municipal bonds are less risky than Treasury bonds.
A) I, II, III and IV
B) I, II and III only
C) II, III and IV only
D) II and III only
Answer: B
20) Kayla is in the 28% federal income tax bracket and the 5%
state income tax bracket. If Jennifer purchases a municipal
bond yielding 4.25%, what is the equivalent yield on a taxable
bond if the municipal bond income is exempt from both
federal and state taxes?
A) 4.47%
B) 5.84%
C) 5.62%
D) 6.340%
Answer: C
21) What is the tax-equivalent yield of a double tax-free 5%
municipal bond if the investor is in the 28% federal and 7%
state tax brackets?
A) 6.94%
B) 7.14%
C) 7.47%
D) 7.69%
Answer: C
22) Which one of the following statements concerning the tax
treatment of municipal bonds is correct?
A) The interest income on municipal bonds is subject to
federal income tax.
B) The capital gain realized on the sale of a municipal bond is
tax-free income.
C) Interest income on a municipal bond is usually exempt
from state and local income taxes if the bond is issued by the
state or locality in which the investor resides.
D) Municipal bonds receive no special income tax treatment.
Answer: C
23) Martin is trying to decide which one of the following
bonds he should purchase. All the bonds have the same
maturity date and all have approximately the same level of

risk. The general level of interest rates is declining. Martin is


in the 33 percent federal income tax bracket and the 6 percent
state income tax bracket. The municipal bonds are from his
home state.

Which bond should Martin purchase if he wishes to hold it for


the long term?
A) bond A because it has the highest yield and is unlikely to be
called when rates are declining
B) bond B because it has the highest after tax yield and is
unlikely to be called when rates are declining
C) bond C because bond D is likely to be called
D) bond D because it has the highest after tax yield and is
unlikely to be called when rates are declining
Answer: C
24) The denomination of most corporate bonds is ________
and the maturities generally range from ________.
A) $1,000; 5 to 10 years
B) $1,000; 25 to 40 years
C) $100,000; 5 to 10 years
D) $100,000; 25 to 40 years
Answer: B
25) Which of the following statements concerning equipment
trust certificates are correct?
I. Equipment trust certificates are typically used to raise
funds for purchasing airplanes and railroad engines.
II. Equipment trust certificates are usually issued with a
single maturity date.
III. Equipment trust certificates normally mature in 20 to 30
years.
IV. Equipment trust certificates generally offer above-average
yields.
A) I and IV only
B) II and IV only
C) I and III only
D) I, III and IV only
Answer: A
26) Which one of the following statements correctly describes
the unique feature of GNMA pass-through securities?
A) The interest income on a GNMA is exempt from state and
federal tax.
B) GNMAs consistently have lives of 25-30 years.
C) GNMAs are backed by the full faith and credit of the
issuing state.
D) GNMAs pay income to holders on a monthly basis.
Answer: D
27) Which one of the following statements correctly describes
the major drawback of a zero-coupon bond?
A) Unless the bond is held in a tax-sheltered account, the
investor must pay taxes on the annual accrued interest even
though no interest is actually received.

B) The conversion feature found on most zero-coupon bonds


generally requires the investor to switch to a coupon-bearing
bond after a period of 5 years.
C) The lack of an annual coupon basically prohibits the
investor from locking in a high rate of return.
D) Because there is no reinvestment of a coupon payment,
large capital losses accrue when interest rates decline.
Answer: A
28) Treasury strip bonds are popular because
I. they are high-quality bonds.
II. they have a wide range of maturities.
III. they are very liquid.
IV. their income is not taxed until the bonds mature.
A) I and III only
B) I, II and III only
C) I, II and IV only
D) I, II, III and IV
Answer: B
29) One of the major problems associated with mortgagebacked securities is that
A) the principal portion of each payment is considered taxable
income.
B) they are refundable.
C) they are self-liquidating.
D) they are serial issues.
Answer: C
30) Which of the following characteristics apply to
collateralized mortgage obligations?
I. All bondholders receive a pro-rata share of all interest
payments.
II. CMOs are derivative securities created from mortgagebacked bonds.
III. All principal payments are paid to the shortest remaining
tranche.
IV. CMOs have definite maturity dates for each tranche.
A) I and II only
B) I and III only
C) I, II and III only
D) II, III and IV only
Answer: C
31) The practice of bundling mortgages or other types of loans
into pools and selling pieces of the pool as bond-like
instruments to investors is known as
A) securitization.
B) privatization.
C) collateralization.
D) fractionalization.
Answer: A
32) Collateralized mortgage obligations are relatively safe
investments EXCEPT
A) when interest rates rise.
B) when inflation is high.
C) when home prices decline.
D) when mortgage holders refinance frequently.
Answer: C

33) Pass-through securities backed by pools of auto loans,


credit card bills, and computer leases are known as
A) PIK bonds.
B) REIMCs.
C) ABSs.
D) Fannie Maes.
Answer: C
34) The practice of bundling mortgages or other loans into
pools and selling shares of the pool as bond-like instruments is
known as
A) securitization.
B) privatization.
C) collateralization.
D) fractionalization.
Answer: A
35) The first tranche of a collateralized mortgage obligation
has
A) the greatest default risk and the least prepayment risk.
B) the greatest prepayment risk and default risk.
C) the greatest prepayment risk and the least default risk.
D) the least prepayment risk and default risk.
Answer: C
36) Which of the following statements are correct in respect to
high-yield bonds?
I. They are junk bonds with highly unpredictable rates of
return.
II. The issuing corporation usually has an excessive amount
of debt.
III. They possess a high level of default and market risk.
IV. They are often subordinated debentures.
A) I, II and III only
B) II, III and IV only
C) I and III only
D) I, II, III and IV
Answer: D
37) PIK-bonds
A) are relatively safe investments.
B) initially pay interest payments in the form of additional
debt.
C) are collateralized by home mortgages.
D) pay monthly interest payments.
Answer: B
10.5 Learning Goal 5
1) The biggest risk with foreign bonds is the risk of default.
Answer: FALSE
2) Foreign companies sometimes issue bonds which pay
interest and principal in U. S. dollars.
Answer: TRUE
3) After the U. S. dollar, bonds denominated in euros are the
largest segment of the global bond market.
Answer: TRUE
4) Yankee bonds are issued by the U.S. government, but sold
only to foreign investors.

Answer: FALSE
5) An American investor who holds euro-denominated bonds
will profit if the euro weakens against the dollar.
Answer: FALSE
6) One type of foreign bond that carries no currency exchange
rate risk for a U.S. investor is a
A) Eurodollar bond.
B) foreign-pay bond.
C) PIK bond.
D) Yankee bond.
Answer: D
7) Which one of the following statements concerning a global
view of the bond market is correct?
A) The United States today accounts for about seventy-five
percent of the available fixed-income securities worldwide.
B) U.S. pay bonds distribute both interest and principal
payments in euros.
C) Foreign bonds, like junk bonds, have high default risk.
D) Exchange rate fluctuations influence the returns earned on
foreign-pay bond holdings.
Answer: D
8) A type of bond that is issued and traded outside the United
States and which is denominated in U.S. dollars but is not
registered with the SEC is
A) a Yankee bond.
B) an issue of the World Bank.
C) an issue of the InterAmerican Bank.
D) a Eurodollar bond.
Answer: D
9) Which of the following statements are correct concerning
Eurodollar bonds?
I. Initial offerings of Eurodollar bonds are sold in U.S. bond
markets.
II. Eurodollar bonds are denominated in dollars.
III. The Eurodollar market is dominated by foreign-based
investors.
IV. Eurodollar bonds originate outside the United States.
A) II and III only
B) I and IV only
C) II, III and IV only
D) I, II and IV only
Answer: C
10) Eurodollar bonds are
A) purchased with dollars but redeemed in euros.
B) purchased with euros but redeemed in dollars.
C) purchased with dollars, but redeemable in either euros or
dollars.
D) purchased and redeemed in dollars but issued by entities
outside the U.S.
Answer: D
11) In general, foreign-pay bonds provide ________ rates of
return and ________ diversification effects for U.S. investors.
A) non-competitive; positive
B) competitive; positive

C) non-competitive; negative
D) competitive; negative
Answer: B
10.6 Learning Goal 6
1) When the call price of a convertible bond stock exceeds the
conversion value of the bond, the issuing company is likely to
force conversion by calling the bonds.
Answer: FALSE
2) The coupon rate on convertible bonds is usually higher than
the coupon rate on equivalent bonds that are not convertible.
Answer: FALSE
3) The conversion ratio denotes the number of shares for
which a convertible bond can be exchanged.
Answer: TRUE
4) Convertible bonds will retain their value as bonds even if
stock prices are falling.
Answer: TRUE
5) LYON's or liquid yield option notes are a type of
convertible security.
Answer: TRUE
6) When convertible bonds are first issued:
I. the conversion price of the stock is higher than the market
price.
II. the market price of the stock is higher than the conversion
price.
III. the coupon rate is higher than if the bond were not
convertible.
IV. the coupon rate is lower than if the bond were not
convertible.
A) I and III only
B) II and IV only
C) I and IV only
D) II and III only
Answer: C
7) Which of the following is most likely to happen with a
convertible bond when the market price of the stock exceeds
the conversion price. The stock does not pay a dividend.
A) The bondholders will immediately convert their bonds to
stock.
B) The issuing company will call the bonds and the
bondholders will redeem them for the call price.
C) The issuing company will call the bonds and bondholders
will convert them to common shares.
D) Both the issuing company and the bondholders will wait
for the bonds to reach their maturity date.
Answer: C
8) Bonhomme Co. issued $1,000 par value bonds with a 6%
coupon rate, convertible into 25 share of Bonhomme common
stock. When the bonds were issued the stock traded at $25 per
share. The stock is now at $42 per share and pays a $0.10 per
share annual dividend. In the near future
A) the bondholders will voluntarily convert their bonds to

stock.
B) The issuing company will call the bonds and the
bondholders will redeem them for the call price (par).
C) The issuing company will call the bonds and bondholders
will convert them to common shares.
D) Both the issuing company and the bondholders will wait
for the bonds to reach their maturity date.
Answer: C
9) When convertible bonds are first issued
I. the conversion price of the stock is higher than the market
price.
II. the market price of the stock is higher than the conversion
price.
III. the coupon rate is higher than if the bond were not
convertible.
IV. the coupon rate is lower than if the bond were not
convertible.
A) I and III only
B) II and IV only
C) I and IV only
D) II and III only
Answer: C

10) Liquid yield option notes or LYONS have which of the


following characteristics?
I. convertibility at a fixed conversion ratio
II. high coupon rates
III. a put feature that guarantees the right to redeem the bonds
at a prespecified price
IV. convertibility at a fixed conversion price
A) I and III only
B) II and IV only
C) I and IV only
D) II and III only
Answer: A
11) Which of the following is a good reason to invest in
convertible bonds?
A) They often have higher than normal coupon rates.
B) They offer protection against rising interest rates.
C) They tend to be issued by stable, low-risk companies.
D) They offer predictable income and a chance to profit from
an increase in the stock price.
Answer: D

Вам также может понравиться