Finance Quiz: Bonds and Stocks

What is a financial asset?

• A claim against the income or assets of an individual, business, or government.

• A physical object of value.

• A type of currency.

• A form of insurance.

What are the major sources of external long-term financing for corporations?

• Shares of stock and car loans

• Credit card debt and personal loans

• Home mortgages and car loans

• Corporate bonds and corporate stocks

What is the main characteristic of preferred stock?

• Lowest priority in bankruptcy

• Voting rights in the company

• Fixed dividend and senior claim on earnings

• Convertible into common stock

What is the purpose of bond covenants?

• To allow early redemption of the bonds

• To provide tax benefits to bondholders

• To increase the value of the bonds

• To impose restrictions or extra duties on the firm

What do bond ratings measure?

• The face value of the bond

• The interest rate of the bond

• The maturity date of the bond

• The likelihood of default

What is the purpose of a sinking fund in bond investing?

• To convert the bond into shares of stock

• To provide a tax advantage to the issuer

• To increase the interest payments to bondholders

• To gradually pay off the debt by setting aside money

How is the price of a bond affected when the required rate of return rises?

• The price increases

• The price remains the same

• The price decreases

• The price fluctuates randomly

What is the formula for calculating the price of a stock using the Gordon model?

• P0 = D0 * (1 - g) / r + g

• P0 = D0 * (1 + g) / r - g

• P0 = D0 * r

• P0 = D0 / r

What is the main risk associated with bond investing?

• Reinvestment rate risk

• Interest rate risk

• Credit risk

• Exchange rate risk

How can an investor annualize a return over a holding period?

• By subtracting the dollar return from the initial price

• By using the formula (1 + percent return)^(1/n) - 1

• By multiplying the percent return by the initial price

• By dividing the dollar return by the initial price