WorksheetsFinancial Literacy Exam 3 – Practice Questions
Total questions: 50
Worksheet time: 25mins
An investment is best defined as:
An asset held only for collecting interest
An asset expected to generate value or a return
Cash kept in a checking account only
Any item purchased for consumption
The income return from a stock typically comes from:
Dividends
Capital losses
Accrued interest
Par value
Speculation most closely means:
Buying assets strictly for their income stream
Buying assets whose value depends mainly on supply and demand
Buying only investment-grade bonds
Diversifying to reduce risk
A derivative security’s value is based on:
The issuer’s par value only
The value of some other underlying asset
The coupon rate alone
Its maturity date
The maturity date of a bond is the date when:
Interest stops accruing but principal remains unpaid
The bond becomes callable
Par value must be repaid to the holder
The bond converts to stock automatically
A share of common stock represents:
A loan to the company
Fractional ownership in the corporation
A guaranteed dividend contract
A Treasury security
A dividend is:
Interest paid on bonds
A payment by a corporation to its shareholders
The par value returned at maturity
The market maker’s fee
A capital gain occurs when:
You receive a dividend
The nominal return equals inflation
You sell an asset for more than its purchase price
You buy a bond below par
The nominal (quoted) rate of return:
Is adjusted for inflation
Is not adjusted for inflation
Equals the real rate minus inflation
Always equals dividend yield
The real rate of return equals:
Nominal return plus inflation
Nominal return minus inflation
Dividend yield minus P/E ratio
Coupon rate minus par value
Interest rate risk is the risk that:
Security prices change when market interest rates change
The issuer defaults on payments
The stock market becomes efficient
A bond cannot be called
Inflation risk refers to:
Falling interest rates increase bond prices
Rising prices erode purchasing power and can move rates
Issuer-specific mismanagement
Liquidity disappearing overnight
Business (firm-specific) risk arises from:
Market-wide shocks only
Company decisions and product performance
Changes in federal tax brackets only
Treasury auction schedules
Market risk is risk associated with:
One firm’s internal operations
Overall market movements
Only inflation changes
Only default events
Political/regulatory risk is caused by:
Unexpected changes in laws or taxes
Call features activating
Maturity shortening
Par value adjustments
Diversification primarily aims to:
Increase unsystematic risk
Eliminate all risk
Reduce total variability without lowering expected return
Raise the P/E ratio
Systematic (market) risk:
Can be eliminated by diversification
Cannot be eliminated by diversification
Exists only for bonds
Exists only for stocks
Unsystematic (firm-specific) risk:
Cannot be diversified away
Is eliminated through holding many different assets
Is identical to market risk
Is measured by the CPI
An investment portfolio is:
A single stock position
A group of investments held by an investor
A money market only
A loan amortization schedule
An efficient market is one where:
Prices reflect all relevant information
Only insiders know prices
Prices never change
Trading occurs only OTC
A stock bubble occurs when prices:
Rise far above intrinsic value over time
Track earnings closely
Fall steadily for months
Equal book value
The dividend yield equals:
Annual dividends divided by earnings per share
Annual dividends divided by price per share
Dividends plus capital gains divided by par
Coupon rate divided by price per share
The P/E ratio equals:
Price per share divided by earnings per share
Earnings per share divided by price per share
Dividends divided by price per share
Price per share divided by dividend
A stock market index measures:
The performance of a representative group of stocks
Individual stock par values
Treasury auction results
Only dividend yields
Primary markets are where:
Previously issued securities trade
Newly issued securities are sold to investors
Only municipal bonds trade
Only OTC trades occur
An IPO refers to:
A firm’s first public stock offering
A repeat seasoned equity offering
A bond refunding
A preferred stock conversion
A seasoned new issue is:
A firm’s first public sale of stock
A new stock offering by an already public firm
A municipal bond with a call feature
A Treasury bill auction
An investment banker typically:
Sets interest rates for the Fed
Intermediates between issuers and the buying public
Regulates exchanges
Manages mutual funds only
Secondary markets are where:
New securities are first issued
Previously issued securities are traded
Only options trade
Only government bonds trade
An organized exchange (e.g., NYSE):
Has a physical location or centralized electronic venue
Is only telephone-based
Trades only bonds
Prohibits market makers
The OTC market:
Conducts trades via networks rather than a single exchange floor
Requires physical floor trading
Lists only futures
Sells only new issues
Par value of a bond is:
The bond’s current market price
The amount repaid at maturity
The coupon rate
The accrued interest
Bond maturity means:
Time until par is returned and the bond ends
Time until next coupon
Time since last trade
Time a bond can be called
The coupon rate is:
Annual interest as a % of par value
Annual interest as a % of market price
Current yield
YTM
An indenture is:
A bond’s legal agreement between issuer and trustee
A municipal tax schedule
A brokerage margin agreement
A pension contract
A call provision allows the issuer to:
Defer coupons forever
Repurchase bonds before maturity at a stated price
Raise the coupon automatically
Convert bonds to stock
A deferred call means the bond:
Can never be called
Cannot be called until a specified number of years has passed
Must be called immediately
Skips all coupons
A sinking fund is:
A reserve to pay off a bond issue over time
A fund to pay dividends
A margin account
A futures collateral pool
Mortgage bonds are secured by:
Corporate inventory
A lien on real property
U.S. Treasury full faith and credit
No collateral
Debentures are:
Short-term notes
Unsecured long-term corporate bonds
Agency bonds
Municipal serials
TIPS are Treasury bonds whose:
Coupon adjusts to LIBOR
Par value adjusts with the CPI to preserve real return
Price is fixed in nominal terms
Maturity is always 30 years
Zero-coupon bonds:
Pay no periodic interest and are sold at a deep discount
Always pay monthly interest
Are always municipal bonds
Have no maturity date
Junk bonds are:
High-quality, low-yield bonds
Low-rated, high-yield bonds (BB or below)
Zero-coupon Treasuries
Agency pass-throughs
Current yield on a bond equals:
Coupon rate × par value
Annual coupon divided by current market price
YTM minus inflation
Par divided by price
Yield to maturity (YTM) is:
The return if the bond is held to maturity, given price, coupons, and par
Always equal to current yield
The same as coupon rate
Par minus price
Accrued interest is:
Interest earned since the last coupon payment but not yet paid
Interest paid ahead of schedule
Interest forgone by the issuer
Only applicable to zeroes
Preferred stock generally:
Offers voting rights and variable dividends
Pays fixed dividends and has priority over common dividends
Guarantees capital gains
Is a Treasury security
A cumulative feature on preferred stock requires:
Dividends to be paid monthly
Past unpaid preferred dividends to be paid before common dividends
Automatic conversion to common stock
Dividends to track CPI
Convertible preferred stock:
Can be exchanged for a set number of common shares
Automatically redeems at par each year
Cannot be valued
Is a type of zero-coupon bond
A money market mutual fund typically invests in:
Long-term corporate bonds only
Short-term instruments like T-bills and commercial paper
Only common stock
Only municipal revenue bonds
