I: True/False 1. All cash equivalents have initial maturities of one year or less 2. Treasury bills and bonds receive semiannual interest payments. 3. Treasury bonds a have minimum face value of $10,000 4. Interest earned on Treasury securities are exempt from State and Local income taxes 5. Treasury securities may be used as collateral to secure loans 6. Treasury Inflation-Protected Securities (TIPS) adjust for inflation on a semi-annual basis 7. Since Treasury securities mutual funds invest primary in Treasury securities, they are insured by the government 8. Corporate bonds are an appropriate alternative for an investor with a short-term time horizon. 9. Payment of interest takes precedence over payment of dividends. 10. All bonds are treated equally if bankruptcy occurs. 11. Market interest rates and bond prices are inversely related. 12. The most important factor in determining the price of a corporate bond is the financial stability of the firm issuing the bond. 13. There is usually no commission charged on the purchase of new issue corporate bonds. 14. Since zero-coupon bonds receive no interest, there are no cash flows associated with these bonds until maturity. 15. Agency risk may be eliminated by an appropriate compensation arrangement with the agent 16. Call risk inherently includes reinvestment risk 17. The longer a bond has to maturity, the less the investment rate risk 18. If interest rates fall below the coupon on a bond, the bond will sell at a discount 19. Market values of bonds vary more for longer terms and greater changes in interest rates 20. Diversification is the only way to protect an investor from systematic risk The sum of the probabilities in a probability distribution must add to 1.0 The expected return is more reliable if the standard deviation is small The mean and standard deviation is all the information that is needed to describe most stock probability distributions The semi-variance concept is conceptually superior to the concept of the standard deviation If two securities with the same standard deviation are perfectly negatively correlated, splitting an investment equally between the two securities completely eliminates all variability II: Multiple Choice 1. Alex has just inherited $250,000. He wants to invest in certificates of deposits (CDs) because he knows they are federally insured deposits. For the entire amount to be insured, Alex may a. Invest less than $100,000 in at least three different banks b. Invest less than $100,000 in at least three different accounts within the same bank, but with different account titles c. Invest the entire amount with a “network” bank that will invest the funds at other banks so as not to exceed limits at any one bank d. All of the above are possible solutions to this situation e. It will not be possible for Alex to insure the entire amount 2. Advantages to investing in Treasury notes include: a. T.

1. I:
True/False
1.
All cash equivalents have initial maturities of one year or less
2.
Treasury bills and bonds receive semiannual interest payments.
3.
Treasury bonds a have minimum face value of $10,000
4.
Interest earned on Treasury securities are exempt from State and
Local income taxes
5.
Treasury securities may be used as collateral to secure loans
6.
Treasury Inflation-Protected Securities (TIPS) adjust for
inflation on a semi-annual basis
7.
Since Treasury securities mutual funds invest primary in
Treasury securities, they are insured by the government

2. 8.
Corporate bonds are an appropriate alternative for an investor
with a short-term time horizon.
9.
Payment of interest takes precedence over payment of
dividends.
10.
All bonds are treated equally if bankruptcy occurs.
11.
Market interest rates and bond prices are inversely related.
12.
The most important factor in determining the price of a
corporate bond is the financial stability of the firm issuing the
bond.
13.
There is usually no commission charged on the purchase of new
issue corporate bonds.
14.

3. Since zero-coupon bonds receive no interest, there are no cash
flows associated with these bonds until maturity.
15.
Agency risk may be eliminated by an appropriate compensation
arrangement with the agent
16.
Call risk inherently includes reinvestment risk
17.
The longer a bond has to maturity, the less the investment rate
risk
18.
If interest rates fall below the coupon on a bond, the bond will
sell at a discount
19.
Market values of bonds vary more for longer terms and greater
changes in interest rates
20.
Diversification is the only way to protect an investor from
systematic risk
The sum of the probabilities in a probability distribution must
add to 1.0

4. The expected return is more reliable if the standard deviation is
small
The mean and standard deviation is all the information that is
needed to describe most stock probability distributions
The semi-variance concept is conceptually superior to the
concept of the standard deviation
If two securities with the same standard deviation are perfectly
negatively correlated, splitting an investment equally between
the two securities completely eliminates all variability
II:
Multiple Choice
1.
Alex has just inherited $250,000. He wants to invest in
certificates of deposits (CDs) because he knows they are
federally insured deposits. For the entire amount to be insured,
Alex may
a.
Invest less than $100,000 in at least three different banks
b.
Invest less than $100,000 in at least three different accounts
within the same bank, but with different account titles
c.

5. Invest the entire amount with a “network” bank that will invest
the funds at other banks so as not to exceed limits at any one
bank
d.
All of the above are possible solutions to this situation
e.
It will not be possible for Alex to insure the entire amount
2.
Advantages to investing in Treasury notes include:
a.
They are virtually default free
b.
They are free of reinvestment risk
c.
They may be converted into cash equal to their par value at any
time
d.
Interest is exempt from Federal, State and Local income taxes
e.

6. All of the above are advantages of investing in Treasury notes
3.
The minimum number of bonds that pay semiannual interest that
an investor must buy to receive an interest check every month is
a.
1
b.
3
c.
6
d.
9
e.
12
4.
Subordinated debentures:

7. a.
Are secured by real estate
b.
Have more risk than general creditors
c.
Are the first to be allocated funds in case of bankruptcy
d.
Are less risky then debentures
e.
Usually have lower coupons
5.
High yield bonds
a.
Usually have a bond rating of A or higher due to their high
yield
b.
Are easier to trade due to their high yield

8. c.
Have less price volatility due to their high yield
d.
Are often referred to as “junk” bonds
e.
A and C are true
Risk is
A:
Variability in expected return
B:
The potential for loss
C:
The possibility returns may be positive, zero, or negative
D:
Uncertainty of a future outcome
E:
All of the above are acceptable definitions
The subcategories of business risk include all of the following
EXCEPT:
A:

9. Management risk
B:
Market risk
C:
Financial risk
D:
Innovative risk
E:
Credit risk
A non-zero coupon bond will sell close to par when:
A:
It is just issued
B:
It is about to mature
C:
Interest rates decrease
D:
All of the above are correct
E:
A and B are correct, but C is not
The correct ranking of securities from most liquid to least liquid
is

10. A:
Savings accounts, listed stocks, residential real estate, CDs
B:
Savings accounts, CDs, listed stocks, residential real estate
C:
Listed stocks, savings accounts, residential real estate, CDs
D:
CDs, listed stocks, savings accounts, residential real estate
E:
Residential real estate, listed stocks, CDs, savings accounts
Two securities that are perfectly positively correlated
A:
Are considered to be independent securities
B:
Have a correlation of 0
C:
Provide no diversification benefits
D:
Have a negative covariance
E:
Are a benefit to the portfolio