Altfest_2e_Test_Bank_Chapter_16.docx

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...

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: f. The longer the period, the greater the potential for a change in the ability of a company to repay its debt g. A broad-based change in interest rates will have a greater effect on long-term bonds h. The shorter the period, the greater the potential for a change in the ability of a company to repay its debt i. Both a and b j. 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? k. Money market l. Short term m. Intermediate term n. Long term o. 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? p. Duration q. Risk r. Quality s. Credit t. 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? u. AAA v. BBB w. CCC x. C y. None of the above 6. Of the following bond ratings, which are classified as medium quality? z. B a. BBB b. A c. Both a and b d. Both b and c 7. What is liquidity? e. The ability to convert an asset into cash quickly and at a relatively low transaction cost. f. The possibility that you will not be able to find a buyer at the current market price for an asset g. The possibility that you will not be able to sell assets without incurring capital gains tax h. Both a and b i. Both b and c 8. The risk premium is equal to which of the following: j. Risk free rate + maturity risk. k. Liquidity risk + risk free rate. l. Liquidity risk + maturity risk + default risk. m. Liquidity risk + risk free rate + maturity risk + default risk. n. None of the above. 9. Bond coupons are: o. Fixed contractual payments that are affected by changes in market rates over time. p. Fixed contractual payments that are not affected by changes in market rates over time. q. Fixed contractual payments that are affected by changes in interest rates over time. r. Fixed contractual payments that are affected by changes in default rates over time. s. None of the above. 10. The amount due at bond maturity is called the: t. Par value. u. Face value. v. Maturity value. w. All of the above. x. None of the above. 11. The coupon yield is: y. The return that is calculated based on the annual coupon and the face value of the bond. z. The annual coupon divided by the market value of the bond. a. The return you would receive if you purchased the bond today and held it until it was repaid. b. All of the above. c. None of the above. 12. The current yield is: d. Annual coupon/face value of bond e. Market value of bond/Annual coupon f. Annual coupon/market value of bond g. Face value of bond/Annual coupon h. 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? i. 6.51% j. 5.31% k. 4.31% l. 3.31% m. 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? n. 0.42% o. 1.42% p. 2.42% q. 24.42% r. None of the above 15. Due to changes in interest rates, s. A premium bond has greater fluctuation in price than a discount bond t. A premium bond has identical fluctuation in price as a discount bond u. A discount bond has a greater fluctuation in price than a premium bond v. Both discount and premium bonds do not fluctuate in price w. None of the above 16. Which of the following is not a factor that leads to market interest rate fluctuations? x. Changes in the expected rate of inflation y. Economic activity z. Federal Reserve actions a. Cyclical investor interest in bonds b. All of the above are factors 17. The maturity of a Treasury bond is: c. 0-1 years d. 2-10 years e. 10 years or more f. All of the above g. None of the above 18. Are U.S. Government bonds subject to federal and state taxes? h. Yes i. No j. They are subject to state but not federal taxes k. They are subject to federal but not state taxes l. None of the above 19. A callable corporate bond may be retired if: m. Interest rates rise sharply n. Interest rates decrease sharply o. Default rates rise sharply p. Default rates decrease sharply q. None of the above 20. Are municipal bonds subject to both federal and state taxes if purchased in the state in which you reside? r. Yes s. No t. They are only subject to state taxes u. They are only subject to federal taxes v. None of the above 21. Why are preferred shares generally considered more risky than bonds? w. They have a lower priority on assets than bonds in the event of bankruptcy x. They lack the assurance of a bond's contracted for return of principal y. They typically have higher yields than bonds z. Both a and b a. 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? b. Relative investing c. Fundamental analysis d. Momentum investing e. Relative timing f. None of the above 23. According to the dividend discount model, the current value of a security is equal to: g. 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) h. 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) i. 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) j. 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) k. None of the above. 24. A mutual fund composed of a blend of stocks and bonds can be categorized as which of the following? l. Industry fund m. Sector fund n. Balanced fund o. Hedge fund p. None of the above 25. What is a load fund? q. A fund that that does not offer sales commissions to the marketers of the funds r. A fund that provides a sales commission to the individual or brokerage firm that markets the fund s. A fund where the management company does not charge a load that they retain t. Both a and b. u. Both b and c 26. Sales charges that are covered under marketing fees for loan funds are: v. 12b-1 fees w. 12a-1 fees x. 10b-1 fees y. 10a-1 fees z. 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: f. Even though the shareholder has not sold any fund shares g. Only when the shareholder has sold fund shares h. Never i. During tax-transition years exclusively j. None of the above 29. The key difference between mutual funds and separately managed accounts is that: k. Mutual funds are taxed as capital gains while separately managed accounts are not l. Separately managed accounts are taxed as capital gains while mutual funds are not m. There is no difference between the two n. 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 o. None of the above 30. What are unit investment trusts? p. Portfolios of stocks and bonds that are traded on the major exchanges q. Portfolios that are set up at a point in time as are mutual funds, but are generally unmanaged r. Investments that wrap mutual funds in a tax-sheltered framework for an extra ongoing charge s. Both a and b t. Both b and c Answer: b Essay questions: 31. List and provide examples of eight types of specialized funds that concentrate in publicly traded securities. Answer (other examples may be applicable as well): 1. Sector Funds: Utility, Technology, Energy 2. Industry Funds: Drug and REIT 3. Commodity: Gold, Precious Metals, Oil and Gas 4. Regional: Midwestern U.S. 5. International: Pacific Rim, European 6. Balanced: Blend of Stock and Bond 7. "Hedge": Mergers and Acquisition, Market Neutral 8. Other: High Dividend Yield, Asset Allocation 32. List and provide a detailed explanation for nine types of bond funds. 9. Government Securities: U.S. government bond funds invest in U.S. government bonds and also in mortgage-backed securities handled by a U.S. governmental agency called GNMA. The latter are often called GNMA funds. 10. Corporate: Generally searches for higher than government yields in investment quality bonds. 11. High Yield: Below investment quality, more risky. Generally invest in high-yield or so called junk bonds. 12. Municipal: Bonds issued by local municipalities, regulatory authorities, and others which are tax-favored. 13. International: Investment quality government and other bonds from abroad. 14. Emerging Market: More speculative bonds from more speculative countries. 15. Floating Rate: Adjusts to market rates, often through purchase of adjustable rate mortgages or corporate debt. 16. Inflation Indexed: Often U.S. government bonds whose rates and principal values vary with inflation. 17. Other: Zero-coupon bond funds, convertible securities funds, multi-sector bond funds, etc. 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. 18. A type load. 19. B type load. 20. C type load. 21. No load. Answer: +-------------+-------------+-------------+-------------+-------------+ | **Type | **Front-End | **Annual | **Redemptio | **12b1 | | Load** | Charge** | Sales | n | fee** | | | | Charge** | Charge** | | +=============+=============+=============+=============+=============+ | **A** | Yes | No | No | Possibly | | | | | | | | | 4-6 percent | | | 0.25 | | | | | | percent | +-------------+-------------+-------------+-------------+-------------+ | **B** | No | Yes | Yes | Generally | | | | | | | | | | 0.75-1.0 | | 1.0 percent | | | | percent | | | +-------------+-------------+-------------+-------------+-------------+ | **C** | No | Yes | No (T**here | Generally | | | | | is 1 | | | | | 0.75-1.0 | percent | 1.0 percent | | | | percent | charge if | | | | | | the shares | | | | | | are sold | | | | | | within the | | | | | | first | | | | | | year.)** | | +-------------+-------------+-------------+-------------+-------------+ | **No-Load** | No | No | No | Possibly | | | | | | | | | | | | 0.25 | | | | | | percent or | | | | | | less | +-------------+-------------+-------------+-------------+-------------+