Chapter 2- Investment Alternatives

44.Term bonds have a single

maturity.A ) T r u e B ) F a l s e A n s : A 45.The
return on a zero-coupon bond is derived from the difference between the price
paidand par
value.A ) T r u e B ) F a l s e A n s : A 46.The deeper
the discount on a zero-coupon bond, the lower the effective
return.A ) T r u e B ) F a l s e A n s : B 47.If a bond
has a coupon greater than the current market yield, it is selling at a
premium.A ) T r u e B ) F a l s e A n s : A 48.Callabl
e bonds attract investors because they can be redeemed
early.A ) T r u e B ) F a l s e A n s : B 49.TIPS
adjust for inflation by adjusting the rate of interest paid on the
bond.A ) T r u e B ) F a l s e A n s : B 50.The major
attraction of municipal bonds is their extremely low
risk.A ) T r u e B ) F a l s e A n s : B
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37.Marketable securities all fall into the category of capital market

securities.A ) T r u e B ) F a l s e A n s : B 38.All U.
S. government securities are considered marketable
securities.A ) T r u e B ) F a l s e A n s : B 39.Mone
y market securities generally carry a low chance of
default.A ) T r u e B ) F a l s e A n s : A 40.The
money market security most often used a benchmark for the risk-free rate is
moneymarket deposit account
rate.A ) T r u e B ) F a l s e A n s : B 41.The rate
spreads between the different money market securities of the same term tend to be
quite
large.A ) T r u e B ) F a l s e A n s : B 42.Treasury
notes represent the nontraded debt of the U.S.
government.A ) T r u e B ) F a l s e A n s : B 43.The
capital market includes both fixed-income and equity
securities.A ) T r u e B ) F a l s e A n s : A
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51.Investors in high tax brackets would be unlikely to invest in municipal

bonds.A ) T r u e B ) F a l s e A n s : B 52.In the
case of a corporate bankruptcy, bondholders are paid before any distributions
are paid to preferred or common
stockholders.A ) T r u e B ) F a l s e A n s : A 53.Bon
d ratings are primarily used to assess interest rate
risk.A ) T r u e B ) F a l s e A n s : B 54.The major
bond rating service is Dun &
Bradstreet.A ) T r u e B ) F a l s e A n s : B 55.The
earnings retention rate is calculated as 1 – dividend
yield.A ) T r u e B ) F a l s e A n s : A 56.The par
value on common stock sets the value that stockholders will receive in case
of bankruptcy.A ) T r u e B ) F a l s e A n s : B 57.LE
APS have maturities dates up to
10 years.A ) T r u e B ) F a l s e A n s : B
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58.Most futures contracts are not

exercised.A ) T r u e B ) F a l s e A n s : A 59.Distin
guish between direct and indirect investing.Ans:Direct investing – buy bonds and
stocksIndirect investing – buy mutual funds, contribute to pension plans, buy lifeinsurance
policies.60.Compare the cash flows an investor expects from coupon bonds, zero-
coupon bonds,and preferred stock.Ans:Coupon bonds – annuity of interest payments
plus lump sum of principal atmaturity.Zero-coupon bonds – principal at maturity.Preferred
stock – annuity ad infinitum (perpetuity)61.How is the earnings retention rate related to
the dividend payout
rate?Ans:Earnings retention rate = 1 - dividend payout rate62.Why is the ex-
dividend date before the holder-of-record date?Ans:So that paperwork can be
completed to show correct owners.63.How is the total book value of equity affected
by stock splitsAns:Stock splits do not affect total value of equity or the individual
accounts, other than the number of shares outstanding and the par value.64.In what sense
is a stock selling for 12 times earnings “cheaper” than a stock with a P/Eratio of
20?Ans:In that investors are willing to pay only 12 times above earnings for one stock
butare willing to pay the higher “price” of 20 times above earnings for the other.65.What are
two direct and one indirect method for individuals to invest in foreign
stocks?Ans:Buy securities directly through exchanges or as American depository
receipts andindirectly through mutual funds.
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66.Explain how writing option contracts (both puts and calls) can generate income
for owners of the underlying stock.Ans:The writer keeps the option premium regardless
of whether or not the option isexercised.67.Rank (lowest to highest) the following
securities in terms of the risk-expected returntradeoff from the investors' viewpoint: common
stock, corporate bonds, U. S. Treasury bonds, options, preferred stock..Ans:U. S. Treasury
bonds, corporate bonds, preferred stock, common stock, options68.What are some
advantages of asset-backed securities to investors?Ans:High yields
with manageable risk.69.Do the stock options markets help stabilize or destabilize
the stock markets? Explain.Ans:Options should be a stabilizing force if options are
used to hedge stock positions.Options might be destabilizing if used for speculation.70.How
do asset-backed securities improve the flow of funds from savers to
borrowers?Ans:Asset-backed securities can be sold to a broader market of investors
than theunderlying securities.
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71.What stated coupon rate would a taxable corporate bond have to have to be
comparableto a municipal bond with a coupon rate of 7 percent if the investor is in the 28
percenttax bracket?
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