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CPCU 410 Module 10 Test Bank
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Which one of the following statements is correct regarding Eurobonds and foreign bonds?
A. They must be denominated in the currency of their issuing country.
B. Their maturities typically exceed 20 years.
C. They pay a higher coupon rate than domestic bonds due to their additional risks.
D. The interest earned on these bonds is not subject to federal income taxation.
Which of the following statements is correct regarding long-term debt instruments?
A. U.S. Treasury bonds are issued with maturities from one to 10 years.
B. General obligation bonds are municipal bonds backed by revenues from a designated project.
C. Government agency issues provide slightly higher returns than Treasury securities of comparable maturity.
D. U.S. Treasury bills pay coupon interest twice per year.
Which one of the following is a characteristic of a Treasury bill?
A. Sold at a premium to face value.
B. Taxation occurs only at maturity.
C. Maturity is typically 5-10 years.
D. Coupon interest is paid semi-annually.
Which one of the following statements is correct regarding debt issued by the federal government?
A. Treasury securities are issued in minimum denominations of $10,000.
B. Interest earned on Treasury securities is not subject to state income tax.
C. GSE securities are less risky than Treasury securities.
D. The owner of a TIPS will receive a fixed coupon payment twice per year.
Which one of the following statements is correct regarding long-term debt securities?
A. Revenue bonds typically offer higher yields than general obligation bonds.
B. Industrial bonds are bonds issued by railroads and public utility companies.
C. Federal National Mortgage Association bonds are backed by the full faith and credit of the U.S. government.
D. Municipal bonds typically offer higher interest rates than comparable corporate bonds.
All of the following statements are correct regarding long-term debt instruments, EXCEPT:
A. Corporate bonds tend to have less liquidity than short-term debt securities.
B. Treasury notes and bonds make coupon payments semiannually.
C. Corporate bonds are almost always issued with a $1,000 face value.
D. Municipal bonds issued by well-known, long-established issuers are void of default risk.
Which one of the following statements is correct regarding Eurobonds?
A. They typically pay interest semi-annually.
B. They are typically unsecured.
C. They must be issued within the issuer’s country of origin.
D. They typically have maturities of one year or less.
John's federal marginal tax rate is 35%. He is considering investing in a tax-free bond issued in his state of residence, which yields 4%. What is the taxable equivalent yield of this bond?
A contract between an issuer and purchaser of a bond that includes the principal, maturity date, and interest rate is referred to as a(n):
B. Sinking fund provision.
C. Asset-backed security.
D. Indenture agreement.
A credit card company sold its receivables to David for cash. The interest and principal repayments on the credit cards will be passed directly to David after passing through the credit card company. David has purchased a(n):
A. Mortgage-backed security.
B. Asset-backed security.
D. Serial bond.
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Which of the following statements is correct regarding the characteristics of bonds?
A. Debentures are corporate bonds that are backed by specific collateral.
B. An indenture is basically a contract between the bond issuer and the bondholders.
C. In the case of corporate bonds, the bondholders are considered owners of the company.
D. The face value of a bond represents the current price at which the bond can be purchased.
A company is considering issuing a bond. Assuming they would like the right to pay off the bond before its maturity, the most appropriate bond to issue would be a:
A. Callable bond.
B. Convertible bond.
C. Adjustable rate bond.
D. Serial bond.
All of the following statements regarding zero-coupon bonds are correct, EXCEPT:
A. They have an uncertain maturity value.
B. They can be sold with either long or short maturities.
C. They do not have any reinvestment rate risk.
D. They are typically sold at a deep discount.
A bond provision requiring the issuer to set aside periodic amounts to repay a portion of the bond issue each year is:
A. Debenture provision.
B. Sinking fund provision.
C. Reserve provision.
D. Conversion provision.
Which of the following bonds has the highest credit risk to the bondholder?
A. Mortgage-backed security.
B. Asset-backed security.
C. Secured bond.
D. Debenture bond.
Which of the following statements is correct regarding asset-backed securities?
A. They are typically structured as convertible bonds.
B. They are free from credit risk because the debt is guaranteed by the U.S. government.
C. They typically have a 15- or 30-year maturity.
D. They may be collateralized by a pool of credit card receivables or auto loans.
Which one of the following types of risk best describes the risk of holding an individual security?
A. Unsystematic risk.
B. Systematic risk.
C. Reinvestment risk.
D. Interest rate risk.
Which one of the following would generally be the most appropriate investment for a liability insurer?
A. Convertible preferred stock.
B. Long-term U.S. Treasury securities.
C. Long-term investment-grade corporate bonds.
D. Short-term U.S. Treasury securities.
Which one of the following statements is correct regarding preferred stock?
A. Preferred stock will generally pay a dividend based on a fixed percentage of the preferred stock’s par value.
B. Convertible preferred stock allows the shareholder to convert the preferred shares into a debt security.
C. In the event of bankruptcy, preferred shareholders have payment priority over the company’s creditors.
D. Like common stock, preferred stock usually contains voting rights for the preferred shareholders.
Which one of the following statements is correct regarding the characteristics of stocks?
A. If preferred stock is issued with a call option, it will be priced as a perpetuity.
B. Most common stock trades occur on the primary market.
C. Preferred stock tends to have a maturity between 20-25 years.
D. Common stock has the lowest preference regarding dividends and liquidation rights.
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An investor recently purchased nonconvertible, noncumulative preferred stock of a company listed on the NYSE. Which one of the following statements is correct regarding the stock?
A. The stock is less volatile than bonds of the same company.
B. The stock dividends that have been accrued in the past may never be paid.
C. The stock can be converted into common stock of the same company.
D. The stock is more susceptible to a decline in value than common stock of the same company.
Cindy in an investment analyst, and she is attempting to determine the price of a stock. To help determine the price, she is reviewing the company’s sales stability, dividend payouts, financial leverage, and expected growth. Cindy is practicing:
A. Efficient market analysis.
B. Technical analysis.
C. Fundamental analysis.
D. Cost analysis.
Financial theory indicates that the most important factor in determining stock price volatility is:
A. Present value of future cash flows.
B. Performance of the individual company.
C. Short-term supply and demand of the stock.
D. General macroeconomic factors.
Which one of the following statements is correct regarding types of investment analysis?
A. Technical analysis requires a thorough understanding of the specific company and its method of operation.
B. Fundamental analysis is more inclusive than technical analysis and encompasses quantitative and qualitative factors.
C. Fundamental analysis concentrates on past price and volume relationships of a security or other broad stock market indicators.
D. A technical analyst would be likely to analyze a company’s earnings and dividend prospects.
Which of the following statements is correct regarding the efficient market hypothesis?
A. The semi-strong form suggests that determining a company’s expected future cash flows will aid in performance.
B. The strong form suggests that following historical charting patterns and volume will aid in performance.
C. The weak form suggests that determining a company’s expected future cash flows will aid in performance.
D. The weak form suggests that following historical charting patterns and volume will aid in performance.
Which one of the following represents the ratio of a company’s dividends to the company’s earnings?
A. Dupont identity.
B. Dividend payout ratio.
C. Debt-to-equity ratio.
D. Current ratio.
An individual believes that stock prices reflect not only public information but also reflect insider information, believes in the:
A. Weak form efficient market hypothesis.
B. Strong form efficient market hypothesis.
C. Semi-strong form efficient market hypothesis.
D. Fundamental analysis method.
An investor sold his entire portfolio of individual stocks and used the sales proceeds to purchase index funds. Based on this investment strategy, the investor believes in:
A. Fundamental analysis.
B. Weak form efficient market hypothesis.
C. Strong form efficient market hypothesis.
D. Technical analysis.
Which of the following is a consistent strategy with the belief in the Efficient Market Hypothesis?
A. Selecting a random set of stocks for a portfolio.
B. Waiting to purchase a stock until it increases above the 30-day moving average.
C. Identifying and purchasing mispriced stocks.
D. Reviewing technical market indicators before purchasing a stock.
Which one of the following actions would be consistent with an individual who believes in technical analysis?
A. Estimating the present value of future dividends of a current stock portfolio to determine the value of the portfolio.
B. Reviewing the current stock portfolio to evaluate trends in sales, earnings, and management initiatives.
C. Obtaining insider information on the future earnings potential of companies in the current stock portfolio.
D. Gathering historical price data to see how a current stock portfolio reacted to changes in interest rates.
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On January 1 of the current year, an investor purchased 100 shares of ABC Company stock for $50 per share. During the year, the investor received cash dividends of $0.10 per share. On December 31 of the year, the stock was valued at $60 per share. The annual rate of return on this investment is:
On January 1 of the current year, ABC Insurance Company purchased a bond issued by XYZ Corporation for its par value of $1,000. The bond has a 4% coupon rate, and the market price of the bond at the end of the year was $1,030. What was the annual rate of return for the first year of the bond?