IM Test 2 Review

The ______ ______ of why a stock price changes is that the price movement of a stock indicates what investors feel a company is worth.

• principal theory

• principal meadows

• Stock Change

• Money Theory

Who is the lender when it comes to bonds?

• you

• the bank

• your uncle vinny

• your broker

What type of rate does a floating-rate bond have?

• fixed

• variable

• unlimited

• limited

DCA is a technique by which, regardless of the share price, a _______ dollar amount is invested on a regular schedule.

• fixed

• varaible

• limited

• unlimited

Paige is considering two investment opportunities for bonds. The taxable (corporate) one has a 8% interest rate, the tax-free (municipal) offers an 6% interest rate. Paige is in the 25% tax bracket. Which bond should Paige purchase?

• corporate

• either one since the yields are the same

• municipal

Answer explanation

take the municipal rate (.06) and then divide it by 1 minus the tax bracket (1-.25). You would do .06/.75. Since the answer is .08 (the same as the corporate bond) you could choose either. If it was HIGHER, you would choose the municipal bond. If it was LOWER, you would pick the corporate bond

Johnny Bananas buys 8 bonds with a face value of $1,000 each, a coupon of 4.5%, and a maturity of 5 years. How much in total interest will he receive from the bonds in 5 years?

• $2,925

• $1,800

• $2,500

• $5,750

Answer explanation

Multiply bonds (8) by the face value (1,000) by the rate (.045) by the years (5)

8 x 1000 x .045 x 5 = 1800

If you invest $25,000 today at 4% interest compounded annually, how much will you have in 5 years?

• $33,878.67

• $30,416.32

• $27,500.00

• $24,250.00

Answer explanation

Interest Compounded Annually= Principal X (1+Rate)n     where n=number of years

Put 1.04 to the 5th power. Take that answer and multiply it by 25,000

Current risk-free rate = 6%

Expected S&P 500 return = 11%

Beta of risky stock ABC = 1.8 What is the Required (Expected) Return of ABC stock?

• 20%

• 15%

• 12%

• 11%

Answer explanation

Risk Free Rate + (Market Return – Risk-Free Rate)  X  Beta

6% + (11-6) x 1.8

6 + 5 x 1.8

6 + 9 = 15%

Which statement is FALSE

• Most bonds pay interest semi-annually.

• Investing is gambling.

• A portfolio combines different assets mixed for the purpose of achieving an investor's goal.

• When you purchase a bond, you are lending out your money to a company or government.

Which statement is FALSE

• Investors need to know how much volatility he or she can stand in their investments.

• The underlying principle of asset allocation is that the older you get, the less risk you should have.

• As a general rule, the longer your time horizon, the more conservative your portfolio should be.

• To correctly diversify, you should buy stocks that vary by industry.