1. 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.
2. ___________ risk is base on the financial integrity of a bond issuer.
d. Interest rate
3. 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
4. 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.
5. ___________ 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
6. 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.
7. When the market rate of return exceeds the coupon rate, a bond will sell at:
b. face value.
c. a premium.
d. a discount.
8. 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 is:
9. 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% federal income tax bracket and the 6% state income tax bracket. The municipal bonds are form his home state.
Bond Type Of bond Board Characteristics
A Corporate 7.2% callable
B Corporate 7% non- callable
C Municipal 4.75% non-callable
D Municipal 4.77% callable
Martin should 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.
10. Which 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.
11. Which of the following statements is correct concerning a global view of the bond market?
a. The United States today accounts for about 75% 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.
12. Which of the following scenarios is most likely to happen with a convertible bond when the market price of the stock exceeds the conversion price and 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 the common shares.
d. Both the issuing company and the bondholders will wait for the bonds to reach their maturity date.
13. Bonhomme Co. ins sued $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.
14. A good reason to invest in convertible bonds is that they:
a. often have higher than normal coupon rates
b. offer protection against rising interest rates.
c. tend to be issued by stable, low-risk companies.
d. offer predictable income and a chance to profit from an increase in the stock price.
15. The required return on a bond is equal to the:
a. real rate of return plus a risk premium plus an expected inflation premium.
b. real rate of return plus the coupon rate plus an inflation rate.
c. risk-free rate plus a risk premium plus an expected inflation premium.
d. real rate plus a risk premium.
16. __________ will tend to cause domestic interest rates to rise.
a. An increase in the money supply
b. A decrease in the rate of inflation
c. a decrease in the federal budget deficit
d. An increase in interest rates overseas
17. Which of the following is a correct statement concerning interest rates?
a. A decrease in the money supply will cause interest rates to decline.
b. A federal budget surplus will cause interest rates to decline.
c. Economic expansions will cause interest rates to decline.
d. Rising interest rates in foreign countries will cause U.S. interest rates to decline.
18. The yield curve depicts the relationship between a bond’s yield to maturity and its:
b. term to call.
c. term to maturity.
19. According to expectations theory if the 1 year interest is 3% this year and expected to be 5% next year, the 2 year interest rate should be approximately:
20. The price of a bond with an 8% coupon rate paid semi-annually, a par value of $1,000, and fifteen years to maturity is the present value of:
a. 15 payments of $40 at 6 month intervals plus $1,000 received at the end of the fifteenth year.
b. 15 payments of $80 at 6 months intervals plus $1,000 received at the end of the fifteenth year.
c. 30 payments of $40 at 6 months intervals plus $1,000 received at the end of the fifteenth year.
d. 30 payments of $80 at 1 year intervals plus $1,000 received at the end of the 30th year.
21. Which of the following is correct concerning mutual funds?
a. The selection of individual securities remains with the mutual fund investor.
b. Mutual funds were first created in the 1980s.
c. The mutual fund industry is the largest financial intermediary in the United States.
d. Mutual funds are generally highly concentrated portfolios.
22. During the 7-year market cycle of 2006-2012, __________ funds outperformed the market average:
a. a majority of large cap
b. a majority of small cap
c. a majority of asset allocation
d. no category of
23. Which of the following best describes the legal organization of mutual funds?
a. Funds are organized as a single entity that handles all functions such as custody and investment decisions.
b. Funds split their basic functions such as record keeping and investment decisions among two or more companies.
c. Funds are owned by the company that manages them.
d. A distributor keeps track of investment and redemption request from shareholders and maintains other shareholder records.
24. The net asset value of a mutual fund increased form $12.03 to $13.53, but its price per share increased by only $1.26. This information indicates that the fund:
a. paid out $1 in capital gains.
b. paid out $1 in dividends.
c. is a closed-end fund.
d. is an open-end fund.
25 Which of the following is correct concerning ETFs?
a. ETFs are based solely on U.S. Indexes.
b. The ETF based on the Standard & Poor’s 500 Index is priced at 1/10 the value of that index.
c. Spiders are based on the DJIA.
d. The ETF based on the Dow is price at 1/10 of the value of the DJIA.
26. Two mutual funds are quoted as follows.
Fund A NAV 17.13 Offer Price 18.18
Fund B NAV 19.03 Offer Price 19.03
Given these quotes:
a. both funds are load funds.
b. fund A is a no-load fund.
c. fund B is a no-load fund.
d. both funds are no-load funds.
27. An aggressive growth mutual fund is a least likely to purchase a stock:
a. with a high P/E ratio.
b. with a high anticipated rate of growth.
c. of an unseasoned firm.
d. with a high dividend yield.
28. The primary objective of an equity-income fund is:
a. capital gains.
b. current income with capital preservation.
c. potentially high capital gains with limited income.
d. high risk-return trade-offs.
29. Ashley believes that the price of gas and oil is about to rise and energy company profits will follow. She should invest in a/an ________________ fund.
a. asset allocation
b. emerging market
d. aggressive growth
30. Automatic __________ is a default option for most mutual funds.
a. reinvestment of dividends and interest income
b. investment of a fixed sum each month
c. conversion from aggressive to conservative funds as clients approach retirement
d. withdrawal of a fixed amount each month
31. investors interested in predictable cash flow from their investments should consider funds that offer:
a. conversion privileges.
b. systematic withdrawal plans.
c. automatic reinvestment plans.
d. automatic investment plans.
32. The conversion privilege provided by mutual fund families allows investors to:
a. move from one fund to another without incurring any capital gains tax liability.
b. be more aggressive since they can re-allocate their funds when market conditions change.
c. re-allocate their funds at anytime as long as they pay an additional sales load on the transferred funds.
d. move from one fund family to another once every six months.
33. An investor who wants to use mutual funds as a storehouse of value should invest in ________ funds.
a. high-yield corporate bond funds & growth
b. growth funds and equity-income
c. equity-income funds and long-term bond
d. money funds and short-term bond
34. Investors seeking tax-exempt income should invest in ____________.
b. government bond
c. municipal bond
d. money market
35. investors are generally well-advised to avoid mutual funds with:
a. highly rated fund managers.
b. low fees and high tax efficiency.
c. consistently poor historical performance.
d. good performance in both up and down markets.
36. Information for ABC Fund is:
Beginning of the year End of the year
NAV $12.80 $11.64
Market Price of the fund shares $13.05 $9.95
Dividends paid over the year $0.90
Capital gains distributed over the year $0.30
The market-based holding period return for ABC Mutual Fund is:
37. Asset allocation should focus on:
a. the investor’s financial and family situation.
b. selection of individual securities within an asset class.
c. maximization of current income.
d. maximization of short-term profits.
38. The fixed-weightings approach to asset allocation:
a. is based on an allocation of an equal percentage of the portfolio to each separate asset category.
b. requires periodic rebalancing of the portfolio to maintain the desired weights.
c. is based on periodic adjustments to category weights in response to market changes.
d. uses stock-index futures and bond futures in a market timing strategy.
39. The S & P 500 Index is an appropriate benchmark for:
a. diversified portfolios of large company stocks.
b. portfolios diversified among serval asset classes such as stocks, bonds, and real estate.
c. diversified portfolios with a mix of large, small, and mid-cap stocks.
d. diversified portfolios of mid-cap and small company stocks.
40. The best index to assess the performance of a portfolio diversified among several asset classes such as stocks, bonds, and real estate is the:
a. Lipper Index.
b. NYSE Composite index.
c. Value Line Index.
d. No suitable index exists.